In the beginning, in Old English, the rules controlling the use of the second-person pronouns were straightforward: 

thou and its variant forms (thee, thy, thine) were used in talking to one person (singular);   you and its variant forms (ye, your, yours) were used in talking to more than one (plural).

And within sentences: 

thou and ye were used as the subject of a clause: thou/ye saw me;   thee and you were used as the object of a clause: I saw thee/you.

But things began to change during Middle English. The first change was the emergence of you as a singular, noticeably during the second half of the thirteenth century. The same kind of development had already taken place in French, where vous had come to be used as a polite form of the singular, as an alternative to tu; and it seems likely that the usage began in English because the French nobility began to think of the English pronouns in the same way. 

The second change took place some time later: during the sixteenth century the difference between the subject and the object forms gradually disappeared, and you became the norm in both situations. Ye was still in use at the end of the century, but only in contexts which were somewhat literary, religious, or archaic. 

So, for anyone talking to one person, there was a choice in Early Modern English: thou or you. And quite quickly the language evolved a set of social norms, based on the distinction. We can see them already present in Le Morte Darthur, written between 1461 and 1470. In Book VII, we read of Gareth arriving at Arthur's court. The king asks Gareth what he wants, addressing him with ye, which would be the expected polite form to an apparently upper-class visitor: 

Now ask, said Arthur, and ye shall have your asking.

Gareth then demands food and drink, as if he were a beggar, and this makes the king immediately change his tone, shown by a switch to thou/thee:

Now, sir, this is my petition for this feast, that ye will give me meat and drink sufficiently for this twelvemonth, and at that day I will ask mine other two gifts.   My fair son, said Arthur, ask better, I counsel thee, for this is but a simple asking; for my heart giveth me to thee greatly, that thou art come of men of worship, and greatly my conceit faileth me but thou shalt prove a man of right great worship.

Gareth's robust reply temporarily restores the king's confidence – but not for long: 

Sir, he said, thereof be as it be may, I have asked that I will ask.   Well, said the king, ye shall have meat and drink enough; I never defended [denied] that none, neither my friend nor my foe. But what is thy name I would wit?   I cannot tell you, said he.   That is marvel, said the king, that thou knowest not thy name, and thou art the goodliest young man that ever I saw.

Only when Gareth later reveals himself to be the king's nephew, does ye return as Arthur's normal mode of address.

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