postgresql authentication

I want to require users to authenticate themselves by entering
a username and/or password when:

    using the psql command

    connecting to a database using the perl interface module.

I am doing this on my 7.1.2 system.

I am trying to do this on my 7.2.1 system.

I have used creatuser and pg_password.

my pg_hba.conf file has the following line:

local    all        password passwd

"select * from pg_shadow;" and "select * from pg_user;" shows
the users I have added but "psql template1" still does not
require a username and/or password.

I have checked the pertinent (I think) parts of the book
"PostgreSQL Introduction and Concepts"  and the administrators guide
on the web site.

Can some kind soul give me a clue how to do it, or where to look
for instructions?

hal