Right after "speaking" (not gamming) the whaleship Goney, the Pequod encountered a homeward-bound Nantucket whaleship named the Town-Ho. [Note that Melville explains "town-ho" as "the ancient whaling cry upon first sighting a whale from the mast-head." However, it is probable that the source is the Nantucket Indian cry, "townor!" , meaning "I have seen the whale twice"; (see Away Off Shore by Nathaniel Philbrick, Mill Hill Press, Nantucket 1994).] The Polynesian crew of the Town-Ho had news of Moby Dick, so Ahab agreed to a short gam. Ishmael narrates the story as though it were being told to his Spanish buddies one evening in Lima, Peru:
Having Ishmael say that he was able to retell the Town-Ho's story while lounging around the "thick-gilt tiled piazza" of the plush Golden Inn of Lima with some Spanish dandies -- Don Pedro and Don Sebastian -- immediately raises the question of how this insignificant foc'stle hand on a doomed Nantucket whaleship parlayed his employment in the whale fishery into the status of a cosmopolitan gentleman of ease. This perhaps, is Melville's way of saying that after sowing his wild oats as a young man in the whaling game, he has arrived in maturity as an affluent, successful writer of whales' tales.
But back to the leaky Town-Ho's story. The best part of it was known only to a few sailors, and their sinister secret was kept from Captain Ahab and the anonymous captain of the Town-Ho, who was a key player in the drama. It seems that a foc'stle hand, one Steelkilt, a "Lakeman, a desperado from Buffalo, a noble animal with a soul in him worthy of Charlemagne" was not much loved by Radney, the mate, "ugly as a mule, yet as hardy, stubborn, and malicious." Steelkilt teased Radney, who -- it was believed -- actually owned shares in the Town-Ho. Radney, therefore, ordered Steelkilt to swab the deck and clean up after a live pig running around loose. This was work for the ship's boy -- and a grave insult to Steelkilt, a leader among the sailors. Steelkilt refused; Radney menaced Steelkilt with a hammer; Steelkilt hauled off and bashed Radney, giving him a stove jaw from which he spouted much blood.
All the while Ishmael was spinning this yarn to the Spanish Dons, they kept interrupting. "What's a Lakeman? Where's Buffalo? Nay, Senor; hereabouts in this dull, warm, most lazy, and hereditary land, we know but little of your vigorous North."
But back to the mutinous Town-Ho's story. As soon as he bashed mate Radney, Steelkilt rallied his followers, and they took over the forecastle deck, defying the captain's order to "turn to" [get to work -- on the pumps, for the ship was really leaky]. Steelkilt and ten men refused to "turn to", because they knew they'd be flogged for their defiance. So Steelkilt and his men wound up locked down below in the foc'stle. Two of them doublecrossed him, tied him up, delivered him to the captain, and they all three got flogged -- with Steelkilt getting his lashes from Radney. So -- and here's what Ahab and the Town-Ho's captain never find out -- Steelkilt plans to murder Radney. But -- Moby Dick appears to prevent that nice boy Steelkilt from committing murder. Moby Dick grabs ol' Rad in his jaws and dives down to Davy Jones' locker with the ol' mule. Steelkilt lives happily ever after. Proving that Moby Dick is the avenger of injustice -- or something like that.
Melville uses this chapter to mock the religious establishment in Lima, by having Ishmael demand a priest and the bible at the end of the tale, to swear that the Town-Ho's story is true.