Nearing home after a long voyage, the H.M.S. Bellipotent, a British man-of-war in need of men, halts the merchant ship Rights-of-Man. Lieutenant Ratcliffe impresses one — and only one — sailor, Billy Budd, who is happy to serve his country and offers no objections. As he leaves, he calls the Rights of Man by name and bids farewell.
Aboard the Bellipotent, Billy assumes the duties of foretopman. He quickly endears himself to his mates and the officers under whom he serves. The captain of the ship, "Starry" Vere, is a quiet, just, and well-read officer. In contrast, Claggart, the master-of-arms, although outwardly placid, is inwardly malevolent and moody.
At first Claggart is friendly toward Billy and seems pleased with his performance of duty. Later Billy is surprised when he is admonished for petty errors. Fearing punishment, Billy seeks advice from a veteran sailor called the Dansker, who says Jemmy Legs (Claggart) is "down on him [Billy]." The Dansker's observation proves correct. Squeak, one of Claggart's corporals, furnishes desired false information to the master-at-arms.
One night, an afterguardsman awakens Billy, who is sleeping on deck, and dispatches him to a secluded spot on the ship. There he asks Billy to join a group of impressed sailors in an insurrection and offers him a bribe. Enraged, Billy begins to stutter and threatens to throw the sailor overboard. The sailor flees.
Shortly after the Bellipotent gives chase to a French vessel, the master-at-arms reports to Captain Vere that Billy is involved in an attempted mutiny. Shocked, the captain orders Claggart and Billy to come to his cabin. When Claggart faces him with charges of conspiracy, Billy is so dumbfounded that once again he is unable to speak; he can only stammer. To vent his feelings, Billy strikes Claggart so forcibly that he kills him.
Captain Vere, in spite of his love for Billy and his knowledge that the act was unintentional, immediately calls a drumhead court to try the foretopman. England is at war. During that same period there have been widespread mutinies in the British fleet. The officers panel finds Billy guilty. The next morning at sunrise he is hanged from the yardarm. He dies with a blessing on his lips — "God bless Captain Vere!"
While returning to join the Mediterranean fleet, the Bellipotent encounters the French battleship Athée (the Atheist). In an attempt to capture it, Captain Vere is seriously wounded. The British vessel defeats the French ship and escorts it to Gibraltar, where Captain Vere dies. In his last moments, the captain murmurs, "Billy Budd, Billy Budd."
Although Claggart is exonerated and Billy Budd executed as a traitor, the spirit of Billy Budd lives on. The common sailors remember Billy's nobility. They keep track of the spar upon which Billy was hanged. "To them a chip of it [is] as a piece of the Cross." A fellow foretopman memorializes Billy in a ballad.