If Lawrence Sherman, the former chief of police of this remote town on the Potomac River, could change history, he says he would have handled the arrest of Charles H. Harbaugh for speeding differently.

"The only thing I regret," Sherman said the other day, "is I didn't shoot the sonovabitch."

But he didn't, and Harbaugh charged Sherman and the town of Paw Paw with false arrest and police brutality and won a judgment this January in federal court. Whether the amount Paw Paw owes is the $10,500 originally awarded in judgment and legal fees, or a lesser amount which the judge has ordered Harbaugh to accept or face a new trial, the hamlet may be stuck with a bill that could break its bank account.

The sum may not be much in the world of metropolitan finance, but for a town whose entire annual budget is $25,500, and which had no liability insurance (though it now buys it at $1,000 a year), even half the original amount looms large indeed.

While billing itself as "the western gateway to the Eastern Panhandle and the historic Shenandoah Valley of Virginia," this town of 644 residents, which is named after a fruit, has only so many attachable assets:

It tried to sell the old brick pump house to satisfy the judgment. The only bidder was Dolores Hott, who lives next door. But because she offered a mere $2,250 for a building town officials say is worth five times as much, her bid was turned down.

There's the 1974 Ford pickup, sitting inside the town hall with a flat tire. And the police cruiser, unused since the only remaining law enforcement officer quit the other week. (That wasn't Sherman; he left in June 1979.) Also there's Camp Hill Cemetery, which the town owns but is hard-pressed to maintain--the mayor and town commissioners often taking turns cutting the grass.

Then there's the town hall itself, of course. When news of Paw Paw's plight spread, the reports suggested the old two-story building was a dispensable asset without which the town could do just fine.

"I guess anything's possible," said Mayor David Clark, who earns $300 a year in his part-time post.

Most everyone here dismisses such thoughts as unworthy of serious consideration, but they admit that Paw Paw is in a pickle. "It's a real mess," said Gaye Thayer, the town librarian, who knows how tight things are here: For the last two years, the town has failed to make its $100 annual contribution to the library.

The financial dilemma has been especially discouraging for a town which for years considered itself the forgotten stepchild of sparsely settled Morgan County. Paw Pawians often complain that they are frequently disregarded by the politicians in Berkeley Springs, the county seat, which is 26 miles away over winding mountain roads.

In recent years, however, able leadership and grantsmanship have brought the town its new county-owned library, 24 units of subsidized housing and a town park. And this spring, a new water treatment plant is scheduled to open and street repaving will also get under way.

Although it still has no bank--residents are hoping to get a branch facility--the town has five churches, a volunteer fire and rescue squad, several small businesses, a senior citizens center and its own high school, which last year graduated 13 seniors.

"We had the thing going good," sighed Clark. "Then this hits us. It's really a headache we didn't need at this time. The worrying and strain of wondering what's gonna happen has really taken a lot out of me. We're really in a sad situation right now."

In a sense, the roots of Paw Paw's present problem date back to 1928, with the completion of what was then hailed as a "splendid interstate bridge" across the Potomac, 100 miles or so upriver from Washington. The span and a new road linked Paw Paw to the relatively large city of Cumberland, Md., 25 miles west. A new world beckoned.

But if the bridge made it easier for the people of Paw Paw to cross the river in search of jobs and goods and services, it also made it easier for out-of-towners to pass through. In 1978, the town installed a traffic light--its first and only--to regulate the bridge traffic one way at a time, and, with its radar car stopping cars barreling off the mountain behind the town, Paw Paw became known as something of a speed trap.

Operating the radar as often as not was Lawrence Sherman, a former Green Beret and West Virginia conservation officer who has also worked as a mercenary in Africa. A somewhat controversial figure in town, Sherman nonetheless had his supporters, who said he tried to establish law and order here.

Then in the early evening of May 3, 1978, Charles Harbaugh, of Berryville, Va., sped into Paw Paw.

Sherman testified he clocked Harbaugh's truck at 47 miles an hour in a 25 mile-per-hour zone. When Sherman turned on his flashing blue lights and attempted to direct Harbaugh to stop, Sherman said Harbaugh sped through a red light and across the bridge into Maryland. Sherman said he pursued the truck, thinking it might be stolen.

Harbaugh denied speeding through Paw Paw, but what happened across the bridge was, by all accounts, a rather Keystone-Cops kind of affair. Sherman and another Paw Paw policeman managed to stop Harbaugh three times, only to watch him speed off each time. The second time, Sherman broke Harbaugh's side window with a nightstick and sprayed Mace inside. As Harbaugh drove off again, according to court papers, he hit one of the police cruisers, damaging the rear bumper, and Sherman fired a flare pellet at the truck's tires.

The Paw Paw police finally apprehended Harbaugh, with the help of Maryland state police. He was handcuffed and taken to jail in Cumberland, where he spent several hours before being released early the next morning.

Harbaugh, in court papers, later described Sherman as a "raving maniac . . . I couldn't understand a word he was saying. I was right upset at that time, sir . . . . Under no circumstances would I have gotten out of his truck to talk to that man."

Sherman said Harbaugh threatened him with a long-handled iron-ended stick, a charge Harbaugh denies. "He drew a deadly weapon," said Sherman, in an interview. "Under the laws of the United States, I could've shot him. I bitterly regret not shooting the sonovabitch."

For denting the police cruiser, Harbaugh was charged with malicious destruction of property, but a judge in Cumberland, saying the West Virginia officers had no business in Maryland, dismissed the charge.

Then a year ago Paw Paw police again tried to ticket Harbaugh. Angry over the officer's manner and professing his innocence, Harbaugh left the policeman standing in the street and headed homeward. Officers from two counties in West Virginia and one in Virginia gave chase. Though Harbaugh got away, Paw Paw Mayor David Clark, who is also justice of the peace, found Harbaugh guilty in absentia and notified Virginia, which suspended his license for three weeks.

A few weeks after he received the suspension letter, Harbaugh filed his lawsuit against Sherman and Paw Paw, alleging violations of his constitutional rights in the 1978 incident and demanding damages of $1.3 million.

He sued under Section 1983 of the 1871 Civil Rights Act, a Reconstruction Era law designed to protect newly freed slaves but increasingly used against municipalities as the result of a series of U.S. Supreme Court decisions that stripped away the immunity of local governments from damage suits.

Harbaugh was not a stranger to litigation. He was jailed for allegedly assaulting his adopted son. Later, Harbaugh said in court papers, he "instigated a write-in campaign to remove the prosecuting attorney and he was removed." He went to court to beat a New Jersey traffic ticket, he said, and won, and has also been engaged in litigation with his sister over their mother's estate.

He is, he says, a man who feels strongly about his civil rights and anybody who violates them. "I went over to Germany to fight a war to stop that," he said last week.

The federal court jury in Baltimore delivered its verdict after almost two days of testimony. Harbaugh claimed legal fees of $9,500 on top of the $6,000 judgment against Paw Paw. Harbaugh's lawyers agreed to accept $10,500.

A separate $1,500 judgment against Sherman was uncollectable. "I don't have anything," said Sherman. "Years ago, I realized the American judicial system is a system of nonjustice and transferred everything I owned to other people."

Nonetheless, Sherman's legal aid lawyer asked the judge to overturn the verdict, reduce the judgment or order a new trial. The judge's actions last week left it up to Harbaugh to accept a smaller sum or face a new trial. "I don't see how you could do much worse" with a new trial, he said.

All of which has left the town of Paw Paw teetering on the brink between hope and despair. Maybe, the mayor muses, Harbaugh will accept monthly payments.

The town council is considering increasing taxes this spring--but not to pay the judgment. Instead, it wants to hire a full-time policeman, at a salary of $12,000 instead of $700 monthly as in the past.

"You don't have enough money to offer them a decent salary to keep them," explained Councilman Carl Cowgill.

Sherman still has his defenders here, among them Jerry Kline, who owns the town grocery and general store. "I really liked him," said Kline the other day, drawing a scriptural if not a literal analogy. "Just like Jesus," Kline said of Sherman, "he died on the cross."

The former officer, meanwhile, is living in his hometown of Wardensville, two counties south. He says the mayor offered him his old job back before the trial but he hasn't heard from him since. He says he's still interested.

He is also interested, he said, in emigrating, to the Republic of South Africa, "after I get Paw Paw back in shape."