It is the end of the eighteenth century, and Billy Budd is a young sailor on a merchant ship called the Rights-of-Man. Billy is a beautiful young man, a specimen of what Melville calls the Handsome Sailor. He is young, simple, innocent, a foundling with no real family, and his charm and good nature put the men around him at ease. The narrator tells us of Billy's one serious weakness: when seized by strong emotion, he stutters.
The time is one of dread for the British Empire: from the continent, Napoleon's ambitions and France's revolutionary fervor menace the world. The navy is extremely short-handed, and recent mutinies have threatened the force that is the foundation of Britain's prosperity and defense. The navy continues to depend on impressments, or forced conscriptions, to fill its rosters.
Billy's merchant ship is boarded by the H.M.S. Bellipotent, but the boarding officer, Lieutenant Ratcliffe, chooses only Billy for impressment. Even so, Captain Graveling protests: Billy, he says, is the ship's peacemaker. By his mere beauty and goodness he puts the men into good spirits. Nonetheless, Billy and his captain have no choice, and Billy is set on his way. As he leaves, he cries out with unknowing prophecy, "And goodbye to you too, old Rights-of-Man" (297).
Life aboard the new ship agrees with Billy. He becomes a foretopman, and loves his new position. Though less a center of attention than he was aboard the merchant ship, Billy does not notice the difference. He is well-liked, and makes friendships quickly. He brings smiles to the faces of the officers and the older, weathered sailors. But he also draws the attention of the master-at-arms, John Claggart.
Claggart becomes obsessed with Billy, despising goodness that he himself will never possess. Through his corporals, he finds small ways of putting Billy on edge, criticizing every slight deviation from protocol and regulation. But he himself never has anything but a kind word for Billy. Despite the warnings of the Dansker, a wise old sailor who befriends Billy, Billy cannot believe that Claggart harbors any ill will toward him.
One night, Billy is asked by an aftguardsman if he would help in the event of a mutiny. Shocked to be approached in such an insidious way, Billy sends the man on his way. But because of a youthful fear of ratting on his peers, he doesn't tell any officers of what has happened. He tells the Dansker, who believes that Claggart is behind some kind of set-up. But even the Dansker, who is reluctant to be involved in anything not directly concerning himself, gives little in the way of advice to Billy.
Claggart's hatred for Billy festers. Finally, the master-at-arms goes to Captain Vere and says that Billy is behind a mutiny plot. Not really believing Claggart, Vere has both men meet with him in his cabin. When faced with Claggart's accusations, Billy is so overcome with emotion that his stutter seizes him. He is completely unable to speak. Helpless, and terrified, the simple boy defends himself the only way he knows how: he punches Claggart. But Billy doesn't know his own strength, and Claggart is slain by the blow.
Vere, grieving for Billy in his heart, calls a drumhead court to decide Billy's case. After Billy speaks and answers the court's questions, he leaves so that Vere can address the court. Vere argues that the court has little real choice. A man has slain an officer. Because of the discontent in the navy, and the large number of impressed men on the Bellipotent, anything less than Billy's execution might result in an all-out mutiny. What's more, the provisions of the code under which they operate are clear: a crewman has slain an officer, and that crewman must die.
The court convicts Billy. He is hanged the next morning. Before he dies, he seems as beautiful as a vision; none of the sailors can look away from him. Billy cries out "God bless Captain Vere!" and the crew echoes him, as they would have echoed anything Billy said. The light of dawn touches him, making him appear like some kind of divinity as he dies. His body, miraculously, is untouched by any of the spasms that mark hanging deaths.
Some time afterward, Vere is fatally wounded in battle. Before he dies, he is heard murmuring Billy Budd's name.
As for the spar from which Billy was hanged, the sailors keep track of its location. Though they know nothing of the secret facts of Billy's case, they all instinctively know that he was innocent. A piece of the spar, to them, is like a piece of the Cross. The novella finishes with a song composed by one of the sailors from Billy's watch. Called "Billy in the Darbies" ("Billy in Irons"), it has Billy waiting for execution and imagining being a corpse dropped down into the sea. The final image of the book is the song's haunting final line. Billy, in chains and awaiting death, imagines himself at the bottom of the sea. He asks for his chains to be loosened, adding, "I am sleepy, and the oozy weeds about me twist."