The theological answer is that John the Baptist was fulfilling the Old Testament prophecies surrounding Jesus that are quoted in the synoptic Gospels ( "a voice crying out in the wilderness" etc. from Isaiah 40:3-5). John baptized, by his own words, so that people would repent of their sins, which would prepare people for the coming of Jesus. However, Jesus would baptize with "fire and the Holy Spirit" (presumably by virtue of his death and Resurrection) and so post-Christ baptism is an entirely different thing than what John did in terms of its spiritual meaning and power. The interaction between Jesus and John is, essentially, John saying, "Why do you need to be baptized? You don't need to repent because you don't sin - not only that, but I'm preparing the way for you" to which Jesus says, "But I have been incarnated as a man and I want to show that I share and will ultimately bear and take away their sins. Oh, and you need to let everyone know I'm the one you've been preparing the way for, so snap to it."

The historical answer is that John was probably a crazy Nazirite radical, and was having people go into the water when they finished their period as Nazirites. We see John's followers condemning Jesus in Matthew 11, noting that John didn't drink wine but Jesus does. This has led to a lot of speculation about whether Jesus was supposed to have been a Nazirite and whether the whole appelation "Nazarene" was in fact an error.