You could have only one Fastpass at a time unless the return window was more than two hours after you’ve made the reservation in which then you could make a second one after two hours. Fastpass was free for all guests, no special treatment for on property guests and as stated above it was at a more limited set of attractions. Disneyland largely uses the original system today, although There is now an option to reserve electronically for a small fee.
You could indeed have two paper fastpasses. Read the paper FP someone else posted.
In the morning, if you arrived early you'd get a paper FP with a return time of like 9:20am.
At 9:20am (start of your FP time window), you could collect your 2nd FP. People ONLY had to wait two hours (between FP) IF their RETURN time was more than 2 hours from when they obtained that FP.
As the day progressed...the time you collected the FP, and the time you could use your paper FP got further.
Also, if yo got a paper FP for a very popular ride, the early return time FP went very quickly. For TSM, if you pulled a FP at 9:05AM you might get a return time of 10:30am. if you pulled your FP just a few minutes later, you might get a return time of 1pm. If you slept, and only arrived at HS at 10:30am, you likely weren't getting a TSM FP at all, unless it happened to be a slow HS day.
On a slow day, if nobody was pulling FP, then the return window times might also get close for less desirable FP. One could often pull a FP for something like Livin' with the Land that opened up a few minutes later. (just time to have a snack, and spend a little $.)
The FP image above shows that FP was pulled at 6:27pm, with a return time of 7:06pm. That must have been a slow day. This person would have been able to pull another FP at 7:06pm, assuming anything was left at that time. Since the person never used this FP, it was likely they didn't return to Soarin' or when they returned, the standby line was very short. (that how I still have my own stack of paper FP).
As someone else stated, for a number of years, CM's were a bit lax. One could never use a FP before the start of the time window, but WDW has never been super reliable on their end: buses that didn't arrive, ride breakdowns, seating people WELL past their ADR times, very slow meals. Most CM's would allow late FP.
I'm pretty certain that's how we discovered the loophole. Space Mtn was down, and CM said no problem. then it happened again at Splash. the only ride that tended to be VERY strict was Soarin'.