The narrator recounts how in the time before steamships, sailors could often be seen surrounding a "Handsome Sailor" in admiring groups. He remembers one time he saw an African sailor with gold earrings and a silk handkerchief, surrounded by a diverse group of shipmates from various countries, who all looked at the handsome sailor proudly. The narrator clarifies that this kind of handsome sailor was not a dandy, but was strong and a good sailor, whose upright "moral nature was seldom out of keeping with the physical make."
The narrator immediately situates his story in a more interesting past, before the arrival of steamships. The morally upright and handsome sailor is a prime example of the way that physical appearance and inner character are connected in the novella. The African sailor shows how a virtuous, handsome sailor can bring together a diverse array of sailors into a tight-knit group of comrades.
The narrator says that this kind of handsome sailor was precisely what Billy Budd, also known as "Baby" Budd, was. Billy was a 21-year-old sailor, who joined the British navy after having served on a merchant ship called the Rights-of-Man. A ship in the royal navy, the Indomitable (called the Bellipotent in some editions), was short of men and thus conscripted civilians. After stopping the Rights-of-Man and seeing Billy Budd, the lieutenant of the Indomitable, Lieutenant Ratcliffe, immediately chose him over any other man to join the boat. Billy Budd did not object, though the narrator comments that any objection would have been "as idle as the protest of a goldfinch popped into a cage."
The lieutenant assumes that Billy will be a good sailor based on his physical appearance. The Indomitable can be seen as representing the powerful force of society (and war), which overcomes the rights of individuals (symbolized by the Rights-of-Man) by forcing Billy to join the navy. Because objecting to the force of the navy would have been as ineffectual as a bird protesting being put into a cage, the narrator implicitly compares society to a cage that inhibits individuals.
The sailors of the Rights-of-Man view Billy with "silent reproach" as he prepares to leave their ship. The narrator describes the ship's captain, Captain Graveling. He is a respectable man, about 50 years old, who values peace and quiet and is always concerned for his boat's safety. As Billy Budd gathers his things from his cabin, Lieutenant Ratcliffe comes aboard the Rights-of-Man and helps himself to some liquor.
The sailors of the Rights-of-Man feel slightly betrayed when their comrade Billy leaves for another ship. But whatever Billy's individual wishes regarding to his duty to his shipmates on the Rights-of-Man, he is forced to depart by the larger forces of society, in this case the navy, which can forcibly impress him into service. Note also how Ratcliffe, the emissary of the navy, casually just takes some liquor from the captain of the Rights-of-Man: another example of "society" enforcing itself on the individual.
Captain Graveling tells Ratcliffe that he is taking away his best man. His crew was full of quarrels until Billy came. Billy's virtue improved those around him, who became fond of him, except for one sailor identified as Red Whiskers. Red Whiskers was jealous and tried to start a fight with Billy. Billy bested him in the fight, and Red Whiskers ended up respecting and loving Billy. The captain says, "anybody will do anything for Billy Budd."
Billy is further characterized as a fundamentally and naturally virtuous man. However, the fact that Billy could improve those around him suggests that people's natures can change. If someone's character can be improved by being in contact with a good person, can it also be corrupted by exposure to evil? The anecdote of Red Whiskers also establishes Billy's physical strength.
Ratcliffe says he understands, but that the king would be pleased to know that Captain Graveling was offering up his best man to a naval ship. Billy Budd emerges from his cabin with a box of things and the lieutenant tells him he can't carry all that on-board, jokingly calling Billy Budd by the name Apollo. The narrator notes that the Rights-of-Man was named after the book by Thomas Paine, which affirms the natural rights of individuals and asserts individual's rights to revolt if their rights are not respected by their government.
Ratcliffe's comment shows that he sees military conscription as the necessary sacrifice of an individual for the greater good of the king and the country. The fact that Graveling's ship takes its name from Paine's book heightens it as a symbol of individual rights, which are here curtailed by societal concerns. The comparison of Billy to Apollo emphasizes his handsomeness, but also links him to a distant, heroic, and mythical past.
As he's leaving the boat, Billy says farewell to his old ship and shipmates. This irritates Ratcliffe, who thinks it's a slight against being conscripted into the navy. The narrator, though, notes that this would have been far from Billy's good nature. Aboard the Indomitable, Billy becomes at home, liked by other sailors for his "good looks" and genial attitude. He is much merrier than most sailors conscripted into the navy and the narrator guesses that this may be due to the fact that he has a family back home he knows is proud of him.
Billy's farewell is a gesture of his camaraderie with his now former shipmates, but Ratcliffe interprets it as a contradiction of his new duty to the Indomitable, and symbolically you could describe Ratcliffe's concern being that Billy's farewell is actually a stated farewell to his individual rights, and as such a slight against those infringing on his rights (though Billy, an innocent, has no sense of this). Billy's good looks and good behavior equally gain him respect aboard his new ship.