Please keep a spare copy of any files in case you make a mistake. More recent distributions still require a password. Then proceed with the steps below to determine if your system has standard or shadow passwords, and how to remove the password. No you haven't. You are obviously new to unices and need to read a good book to find out how things work.
Loopback support is compiled into most distribution kernels.
Check that the interface is configured with the ifconfig command. By Internet convention, the network number is 127.0.0.0, and the local host address is 127.0.0.1. If everything is configured correctly, you should be able to telnet to your own machine and get a login prompt. It miscounts a time zone offset, confusing seconds with minutes or something like that. Get a recent version.