How did "terribly" come to mean "very" or "exceptionally"?
Solution 1:
In the eighteenth century, the overwhelming majority of matches for "am/is/are/was/were terribly" link to words such as afraid, alarmed, broken, bruised, burnt, frightened, hurt, injured, maimed, mangled, oppressed, shaken, shocked, and wounded. All of these phrases suggest severe physical or psychological damage—and just cause, one might say, for terror.
But at some point in the late 1700s, a different sense of terribly begins to appear. It wasn't that terribly in many of the instances couldn't be interpreted as meaning "very badly" (in a figurative sense); it was that it could just as plausibly be interpreted as meaning "extremely" or "very"—with no necessary grounding in physical pain, mental suffering, or terror.
The Sydney trove
In my Elephind searches of U.S. and Australian newspaper archives, the earliest matches for this new sense of terribly emerge in the 1820s and 1830s in a specific locale: Sydney, Australia. Five such examples appear in city newspapers during the years from 1824 to 1832, a period when the usage was not present in Elephind matches for terribly from any other U.S. or Australian newspaper.
From a letter to the editor of the Sydney Gazette and New South Wales Advertiser (November 18, 1824):
Beg pardon, but hope no offence, in informing you, that I have been a resident in this Colony (into which I came as a prisoner) for upwards of 14 years past; and being a plain sort of man, with a fair character, and tolerably well off in point of circumstances, I have now and then been called to serve as a Juryman, in cases of what they called the Coroner's Inquest, where a fellow-creature has been murdered, or said to be; ...
I have heard from a neighbour of mine, that this sitting on Inquests, by men of our class in the Colony, is now done with; and that because we are made free, either by pardon or by servitude, that we are not to be restored to the rights of British subjects, and that we =must not think or expect to serve upon Juries any more. Not much hardship in the case, Sir, seeing that we shall not have the trouble of attending at the risk of neglecting our own private concerns; but it puzzles us all to think why, if we have been summoned as Jurors on Coroner's Inquests, we are not as well qualified to sit and try matters at Quarter Sessions; which I maintain can never be of so much consequence, as where cases of murder have come before us. I have always understood, that a Juror belongs to a body of twelve men, to try people who are brought forward by the Grand Jury, and I am terribly mistaken if he, who was a Juror last year, is not as able to be a Juror now, unless indeed Parliament has determined it otherwise, and then there's an end of the question.
From "English News," in the Sydney Gazette and New South Wales Advertiser (May 9, 1829):
" The official Gazette is terribly dull, It maintains an absolute silence respecting passing events. As a set-off against this, there has been published, under special authority, a pamphlet, which contains bitter reproaches against the King of France, because he has not re-established the ancient regime purely and completely. This pamphlet loudly demands the total extermination of the constitutional Portuguese."
From "New Views of New South Wales," in the [Sydney, New South Wales] Australian (April 28, 1830):
Enough of my grandmother.—But notwithstanding the great increase of knowledge which she deplored, English people generally do consider New Holland "terribly out of the way." Out of the way of what? Of England? Yes; but is every part of the world a pleasant or hateful residence, only according to its facilities of communication with England?
From "Circumstantial Evidence," in the Sydney Gazette and New South Wales Advertiser (July 14, 1832):
As time wore on, however, their confidence diminished. The evidence against him [George Owen] was terribly strong. He had been observed looking about the rick-yard with a lanthorn, in which a light was burning, by a lad in the employ of farmer Mayne, who had gone thither for hay to fodder his cattle about an hour before the fire broke out. At eleven o'clock the hay-stack was on fire, and at ten Robert Doyle had mentioned to James White, another boy in farmer Mayne's service that he had seen George Owen behind the great rick. Farmer Mayne himself had met him at half-past ten (as he was returning from B. market) in the lane leading from the rick-yard toward the village, and he had observed him throw something [which proved to be a lantern] into the ditch.
From "American Expressions" in the Sydney Gazette and New South Wales Advertiser (November 15, 1832):
In America, a man or woman may be very clever without possessing one grain of talent. The epithet is applied almost exclusively to a person of an amiable and obliging disposition. Mr. A. is a man of no talent; no: but he is a very clever man. According to their meaning, Bonaparte was terribly stupid, and Lord Worth was a very clever fellow indeed.
This phenomenon isn't limited to terribly. For example, from the "New Holland" in the Sydney Gazette and New South Wales Advertiser (September 26, 1829):
AUGUST 2.—Morning cold with frost, at daybreak, accompanied by Capt. Logan, Mr. Cunningham, and two men commenced ascending the mountain. On attaining the summit of the ridge passed over yesterday, we found that it led to the centre of the northern front of the mountain, and to at least an elevation of 2000 feet above the level of the Logan at its base; here the view of that front is terrifically grand, presenting a perpendicular mass of rock uninterrupted even by the least sign of vegetation, excepting a few [l]ichens. From the above ridge we scrambled with considerable difficulty, and some risk, over masses of detached rock, lightly studded with trees and shrubs, which assisted us greatly for about 1000 feet to the summit of one of the defiles of the mountain; here for some time all further progress seemed to terminate. From this point we saw Mount Warning, bearing E. 3° South, distant about 25 miles.
And from "Latest English News," in the Sydney [New South Wales] Monitor (February 1, 1832):
The news in the German papers is horribly practical to Russia; and through the channel of France, we have a mass of pretended private letters, full of fictions, forgeries, and mutual contradictions.
English antecedents
The emergence of terribly in the sense of "extremely" in Sydney suggests that the practice may actually have started in the British Isles, a possibility strengthened by the fact that the earliest (1824) Sydney match is from a letter writer who reports having been transported to the colony as a prisoner around 1810. I don't have a subscription to the British Newspaper archive, so I can't see the original images of the newspapers there, but I searched through the thumbnail matches for "were terribly" and found a number of early instances in which terribly appears to be being used in the figurative sense of "extremely." (In these examples I have corrected what appear to be OCR errors, when the actual word used seems obvious.)
From Saunders's News-Letter (August 14, 1778):
Accordingly, we lay on our quarters all night, expecting in the morning dreadful affray but day light we were terribly disappointed, and found that under the darkness of the night they had all got away.”
From the Northampton Mercury (August 5, 1782):
The French in general behave exceeding well to the English Planters, though they were terribly chagrined at the Defeat of Count de Graffe, and expressed Displeasure at the imprudent Zeal of two or three People who held a ...
From an account of a boxing match in the Leeds Intelligencer (June 17, 1788):
... Crabbe being a Jew, and known to be of sound bottom, his poor brethren of the Synagogue, particularly Mendoza, were terribly taken in.
From the Kentish Gazette (December 9, 1791):
They who panted for the gratification of receiving the first public bridal visit, were terribly disappointed, as the young illustrious stranger did not make her appearance ; ...
From the Hereford Journal (July 16, 1794):
... Government could be depended upon by their Allies, was impossible to tell, for they had no Allies: but this we knew, that they were terribly punctual in their threats.
From the Derby Mercury (September 25, 1795):
Happily, however, no lives were lost, or limbs broken, but the Sunday garments were terribly rent.
From the Northampton Mercury (October 10, 1812):
The American Brigadier-General, who flattered his imagination that he should take Canada terror, has been terribly mistaken, (his bombastic Proclamation has happily served to discover both his weakness and his wickedness, and his friend Citizen ...
From the Suffolk Chronicle (March 18, 1815):
... eggs, mud, brickbats, and stones, which flew in all directions; several of which hit them, and their faces and clothes were terribly bespattered with filth.
From the Hereford Journal (August 13, 1817):
Oh! says I, the poor gentlemen has lost his senses, why he must spake [as] he chooses—I suppose this were terrible sharp ; for they all burst into loud laugh, and swore I was rum chap, and gid me some brandy ; which I was glad of, cause ...
From the Hereford Journal (August 13, 1817) (very likely the same article responsible for the preceding excerpt):
Calais is very dirty, no pavements like England-; and tis terrible funny [to] hear all about you chattering, and you not know a word that's said—just like being among a parcel of turkey's.
From the [London] Morning Advertiser (November 5, 1819):
The fact is, this pair of heroes thought they could fight, but they were terribly deceived, for two greater swaggers I never saw.
From the Hampshire Telegraph (August 10, 1829):
... favourite horse, Mameluke, was backed for a large amount at the Goodwood races, by some of the principal betting men, who were terribly out in their judgment. It will be seen that the Derby horse, Frederick, is gone back to 18 to 1, the other having the call.
From the [London] Morning Advertiser (September 8, 1829):
He and Snowball, as Sambo [is] elegantly termed, preach terribly moral lessons to Deville; both expose Deville [to] protect Mrs. Mortimer, and counteract the canting, hypocritical Miss Gloom'y ...
Conclusions
Until fairly late in the eighteenth century, terribly seems to have been limited to instances involving extreme physical or mental suffering. The first movement (by 1778) beyond that narrow usage seems to have involved mental states—from terribly alarmed, frightened, shocked, and afraid (all of which contain an element of panic) to terribly disappointed and terribly chagrined (which suggest serious unhappiness but not terror). By 1788, instances had begun to appear in which terribly meant "badly," with a clear sense of harm or dire threat: terribly taken in, terribly punctual [threats], terribly rent [clothing].
Next (by 1791) came the introduction of terribly in a figurative sense of "badly" that became indistinguishable from "extremely": terribly disappointed that a hoped-for celebrity sighting failed to occur; terribly mistaken about some objective point of fact that carried no dire consequences; terribly out of the way geographically.
And finally came the appearance of terribly in settings where the word means "very" or "extremely" but can't mean "badly," as in the 1817 observation of how "terrible funny" it is to hear people speaking another language and not be able to understand anyone. Other instances of this positive use of terribly appear at various points during the 1800s: terribly glad (by 1842); terribly sweet (by 1843); terribly good (by 1849); terribly wise (by 1849); terribly thoughtful (by 1850); terribly amusing (by 1851); terribly devoted (by 1851); terribly virtuous (by 1856); terribly loyal (by 1863); terribly comfortable (by 1865); terribly polite (by 1866); terribly kind (by 1867); terribly happy (by 1875); terribly generous (by 1886); terribly courteous (by 1889); and terribly friendly (by 1895).
It's interesting that the 1819 instances of terribly used in a non-negative sense ("terrible sharp [meaning 'having a good wit']" and "terrible funny") involve an uneducated speaker who uses terrible, rather than terribly, as his intensifier of choice. The bumpkin element in the origin of this usage is underscored in this slightly patronizing instance from the Salisbury and Winchester Journal (November 18, 1839):
... [a] fellow living near Tiverton, of the name of Baker, who is accounted, to use [a] provincial expression, terribly clever, being able detect the thief and remove the disease, &c.
Also noteworthy is a strong hint of sarcasm in the wording of the 1829 instance ("terribly moral"), as if to signal that the author recognized the incongruousness of juxtaposing terribly with moral. But over time, as often happens in English, the upper classes adapted themselves to the uncouth provincial expression and came to use it with no more self-consciousness than the nearest yahoo would in saying the same thing.
Solution 2:
The Online Etymology Dictionary writes regarding the use of terribly being an intensifier:
In the sense of "extremely" it is first recorded 1833;
Hope this is helpful!