TO understand why the American decision to talk to the Palestine Liberation Organization (PLO) caused such a spectacular, and varied, reaction, one must start with an understanding of what is actually going on. The real issue behind all the rhetoric is whether the Israel of the future is to be ``big'' or ``little.''

In this respect, ``big'' means Israel's holding all of the land lying West of the Jordan River, plus the Golan Heights on the East Bank. Maintaining a Jewish majority in that state would require expelling another million Arabs in addition to those now living in exile. ``Little'' means roughly the Israel that existed from 1947 to 1967, with most of the presently occupied territories to be self-governed by Arabs, with no Israeli soldiers or police having authority over Arabs.

The decision whether the ultimate Israel is to be ``big'' or ``little'' lies with the United States. A ``little'' Israel existing by consent of the Arab neighbors and living in a mutually cooperative common market with those neighbors could conceivably someday be able to survive without any American subsidy. A ``big'' Israel means a state of continuing hostility with its Arab neighbors and an increasing drain on the US Treasury.

The most significant thing that happened on the day after Secretary of State George Shultz announced that the US would open direct talks with the PLO was a hurriedly called meeting in New York of the Conference of Presidents of Major American Jewish Organizations. The meeting was behind closed doors. The chairman, Morris Abram, held a press conference after the session and announced ``I accept what [Mr. Shultz] has done.'' He added that he had the backing of the ``majority'' of his group's constituent organizations.

The government of Israel protested Shultz's action. Hard-line Israelis vied in the vigor of their denunciations of the deed. Hard-line American Zionists echoed the protests from Israeli government sources. But Mr. Abram, speaking for the great majority of American Jews, accepted the deed.

In other words, Shultz had the consent of the most representative and responsible spokesman of the American Jewish community for the decision to have American diplomats meet and open a dialogue with Yasser Arafat, chairman of the PLO.

This sends a message to the government of Israel. It says that the US government, with the consent of the leaders of the American Jewish community, is not willing to commit itself any longer to the costs of an Israel that refuses to come to terms with the Arab community in the Middle East. The US is talking with the PLO because only by so doing can the road be opened toward a peace to involve a little, not a big, Israel.

This is a painful moment for Israel. Half its population, insofar as one can judge from election results and public-opinion polls, wants the bigger Israel of Menachem Begin's dreams. That half wants it bitterly and passionately. The repression of the Arab uprising on the West Bank testifies to this daily.

So long as the US refused to talk to the PLO directly, the US was, in effect, underwriting the desire of those who want the ``big'' Israel. It was implying that the US would go on indefinitely subsidizing Israel in a state of perpetual hostility with the Arab community.

Now we are in a new game. Shultz denies that the decision to talk with the PLO means recognizing a Palestinian state. Technically, he is correct. But the Israelis who protest the deed are also correct. The mere fact of talking recognizes that there is a Palestine independence movement, that its spokesman is Mr. Arafat, and there can be no true peace in the Middle East by means other than an agreement between Israel and the PLO. In other words, the US now, for the first time since 1975, is moving down a road that could mean a peace, because it aims at a small rather than a big Begin-type Israel.

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