The plot follows Billy Budd, a seaman impressed into service aboard HMS Bellipotent in the year 1797, when the British Royal Navy was reeling from two major mutinies and was threatened by the Revolutionary French Republic's military ambitions. He is impressed from another ship, The Rights of Man (named after the book by Thomas Paine). As his former ship moves off, Budd shouts, "Good-by to you too, old Rights-of-Man."
Billy, a foundling, has an openness and natural charisma that makes him popular with the crew. For unexplained reasons, he arouses the antagonism of the ship's Master-at-arms, John Claggart, who falsely accuses Billy of conspiracy to mutiny. When the Captain, the Hon. Edward Fairfax "Starry" Vere, is presented with Claggart's charges, he summons Claggart and Billy to his cabin for a private meeting. Claggart makes his charges and Billy is unable to respond, due to a stutter which grows more severe with intense emotion. He strikes and accidentally kills Claggart.
Vere convenes a drumhead court-martial. He acts as convening authority, prosecutor, defense counsel and sole witness (except for Billy). He intervenes in the deliberations of the court-martial panel to persuade them to convict Billy, despite their and his belief in Billy's moral innocence. (Vere says in the moments following Claggart's death, "Struck dead by an angel of God! Yet the angel must hang!") Vere claims to be following the letter of the Mutiny Act and the Articles of War.
Although Vere and the other officers do not believe Claggart's charge of conspiracy and think Billy justified in his response, they find that their own opinions matter little. The martial law in effect states that during wartime the blow itself, fatal or not, is a capital crime. The court-martial convicts Billy following Vere's argument that any appearance of weakness in the officers and failure to enforce discipline could stir more mutiny throughout the British fleet. Condemned to be hanged the morning after his attack on Claggart, Billy before his execution says, "God bless Captain Vere!" His words were repeated by the gathered crew in a "resonant and sympathetic echo."CH 26
The novel closes with three chapters that present ambiguity:
- Chapter 29 describes the death of Captain Vere. In a naval action against the French ship, Athée (the Atheist), Captain Vere is mortally wounded. His last words are "Billy Budd, Billy Budd."
- Chapter 30 presents an extract from an official naval gazette purporting to give the facts of the fates of John Claggart and Billy Budd aboard HMS Bellipotent — but the "facts" offered turn the facts that the reader learned from the story upside down. The gazette article described Budd as a conspiring mutineer likely of foreign birth and mysterious antecedents who, when confronted by John Claggart, the master-at-arms loyally enforcing the law, stabs Claggart and kills him. The gazette concludes that the crime and weapon used suggest a foreign birth and subversive character; it reports that the mutineer was executed and nothing is amiss aboard HMS Bellipotent.
- Chapter 31 reprints a cheaply printed ballad written by one of Billy's shipmates as an elegy. The adult, experienced man represented in the poem is not the innocent youth portrayed in the preceding chapters.