When displaying items using the Thumbnails, Tiles, Icons or Small Icons methods, items are normally displayed in orderly columns, laid out according to available width in the Files pane. Checking the Auto Arrange menu item enforces this requirement.
When Auto Arrange is unchecked, items may be dragged to positions outside the columns allowing the user to visually organize the pane to his liking. This is not a permanent re-ordering; the effect is merely visual.
If the view is changed, for example from Thumbnails to Icons, the items are initially organized in columns even if Auto Arrange is not enabled.
The following image demonstrates what can be done with Auto Arrange turned off (disabled).