William Bush, who becomes Hornblower's faithful companion and best friend, is introduced boardingHMS Renown
as the Third Lieutenant. Hornblower is the Fifth and junior Lieutenant. It is quickly apparent that Captain James Sawyer suffers from paranoid schizophrenia, constantly suspecting plots to undermine his authority and inflicting irrational and arbitrary punishments upon Hornblower and other officers. A young volunteer named Wellard suffers particularly badly. Four of the Lieutenants meet in secret in the lower decks to discuss what can be done, but are interrupted when Wellard warns them that the Captain is on his way to arrest "mutineers". The officers scatter and attempt to appear as if nothing had happened, and in the confusion, they learn that the Captain has somehow fallen head-first into the hold.
When the Captain regains consciousness, he has entirely lost his reason as a result of the fall, and is incapable of resuming command. The First Lieutenant, Buckland, takes charge; but having appeared to be steady enough at the start of the book, he is overwhelmed by the responsibility. Ordered to capture an anchorage from which Spanish privateers are operating, he makes a clumsy frontal attack which is repulsed. Hornblower brilliantly retrieves the situation, when he suggests a surprise attack at night. Bush leads the successful attack, but it is Hornblower who is instrumental in negotiating the unconditional surrender of the remaining Spanish forces.
The Spanish base at Samaná is destroyed, a Spanish privateer and some small craft are captured and Buckland's promotion seems assured. Unfortunately for him, the Spanish prisoners take control of the Renown during the night, taking Buckland prisoner asleep in his cot. Hornblower alertly retakes the ship, but in the desperate fighting, Bush is severely wounded and the helpless Sawyer is killed.
Upon their return to port, there is an awkward Court of Enquiry. Hornblower repeatedly denies any knowledge of how Captain Sawyer came to fall into the hold. After enquiries end indecisively, Buckland is passed over; instead, Hornblower is promoted to Commander.
Unfortunately, the Peace of Amiens (1802) is signed before Hornblower's promotion can be confirmed, and he is demoted once again to a lieutenant. Moreover, the demotion is retroactive, and he is forced to repay the additional money he had received as commander. Reduced to poverty, he ekes out a living by playing whist for money. He resides in a lodging house, where he meets his future first wife Maria (née Mason), the daughter of the landlady. Bush meets him several times, and notes in a newspaper that Midshipman Wellard, who (apart from Hornblower) might be the only witness to Captain Sawyer's fall into the hold, has drowned in an accident.
The Peace of Amiens comes to an end in 1803. War has not yet begun, but is imminent, as evinced by a press gang Hornblower and Bush encounter. Hornblower's promotion is confirmed (by a Lord of the Admiralty he impresses with his exceptional cardplaying skills) and he is appointed commander of a sloop of war.