Captain Edward Fairfax Vere, an old man, reflects on his life and his time in the navy. He reflects on the conflict between good and evil, he is tormented by guilt over the case of Billy Budd on board his ship, HMS Indomitable, some years earlier.
The crew of the Indomitable works on deck. For slipping and bumping into an officer, the Novice is sentenced to be flogged. At the same time a cutter approaches, returning from a merchant ship where it has pressed three sailors into the Royal Navy.
One of these sailors, Billy Budd, seems overjoyed with his situation – entirely different from the other two who are not so happy. Claggart, the Master-at-Arms, calls him "a find in a thousand," despite the slight defect of a stammer. Billy says a jaunty farewell to the Rights o' Man, his former ship, innocent of what his words imply. The officers take his words as a deliberate provocation and order the men below decks. Claggart tells Squeak, the ship's corporal, to keep an eye on Billy and give him a rough time.
The Novice returns from his flogging, unable to walk and helped along by a friend. Billy is shocked at the cruelty of the punishment, but is certain that if he follows the rules he will be in no danger. Dansker, an old sailor, nicknames Billy "Baby Budd" for his innocence.
At this point in the four-act version came the climax of Act I, in which Captain Vere appeared on deck to give a speech to the men. In the two-act version, Dansker simply tells the others Vere's nickname, "Starry Vere," and this is enough for the impulsive Billy to swear his loyalty to the unseen captain.
In his cabin, Captain Vere muses over classical literature. His officers enter, and they discuss the revolution in France and the mutinies in the Royal Navy sparked by French ideas of democracy. The officers warn that Billy may cause trouble, but Vere dismisses their fears and expresses his love for the men under his command.
Below decks the sailors rough-house, but old Dansker remains gloomy. Billy goes for some tobacco to cheer him up, and discovers Squeak rifling through his kit. In a rage, Billy begins to stammer. He knocks Squeak to the ground as Claggart and the corporals enter. Billy is still unable to speak, but Claggart takes his side and sends Squeak to the brig. However, when alone, Claggart reveals his hatred for Billy and vows to destroy him. He orders the Novice to try to bribe Billy into joining a mutiny, and the broken-spirited Novice quickly agrees. Billy refuses the bribe and believes he will be rewarded, but Dansker warns him to beware of Claggart.
Claggart begins to tell Vere about the danger that Billy represents, but is interrupted by the sighting of a French ship. The Indomitable attacks, but loses the enemy in the mist. Claggart returns, and tells Vere that Billy poses a threat of mutiny. Vere does not believe him and sends for Billy so that Claggart may confront him.
Later, in Vere's cabin, Claggart repeats the false charge to Billy's face. Once again, Billy begins to stammer in rage. Unable to speak, he strikes Claggart, killing him. The Captain is forced to convene an immediate court-martial, and the officers find Billy guilty and sentence him to hang. Billy begs Vere to save him, and the officers appeal to him for guidance, but Vere remains silent and accepts their verdict. He goes into the cabin where Billy is being held, and the orchestra suggests a tender offstage meeting as the captain informs Billy of the death sentence. This was the end of Act 3 in the four-act version.
Billy prepares for his execution in his cell. Dansker brings him a drink and reveals that the crew is willing to mutiny for his sake, but Billy is resigned to his fate. Four o'clock that morning, the crew assembles on deck, and Billy is brought out. The Articles of War are read, and show that Billy must be hanged. Just before his execution, he praises Vere with his final words, singing "Starry Vere, God Bless you!" echoed by the rest of the crew.
Vere, as an old man, remembers Billy's burial at sea, reflecting that the man he failed to save has instead blessed and saved him. As he recalls Billy's blessing, he realises he has discovered genuine goodness and can be at peace with himself.