RAM gets used up too quickly - any ideas?

I am sure this is a problem which can be solved quickly by one of the many very knowledgeable guys out there:
I have a 2007 MacPro 2.66 Dual core with 8 Gb RAM (well out of date I know) but this is the problem. After booting up with no other programmes just Lightroom and Photoshop I start working on files. The 'Free' RAM on Activity Monitor goes from about 6Gb immediately to about 1.6Gb. The TIFF size I work on is about 220Mb. The computer slows right down and the only solution is to reboot to start working on the next image. This is very time consuming. I have been waiting for the launch of a new MacPro for ages but still there is nothing on the horizon and i may have to plump for a fully loaded iMac. In the meantime is there anything I can do? Something seems to be clogging the system up quickly. It didn't used to happen like this.  The VM size is showing as 233 Gb but is this actually being used?
Help please?

Hi Matt,
Thanks for your quick response.
Page Outs (at the moment and it is really slow now) are: 2.82GB. I replaced the original 250 Gb HD with a 500Gb and there is currently 318Gb free.
This is the info from my Mac:
ntel ESB2 AHCI:
  Vendor:          Intel
  Product:          ESB2 AHCI
  Link Speed:          3 Gigabit
  Negotiated Link Speed:          1.5 Gigabit
  Description:          AHCI Version 1.10 Supported
ST3500630AS:
  Capacity:          500.11 GB (500,107,862,016 bytes)
  Model:          ST3500630AS                            
  Revision:          3.AAK  
  Serial Number:                      9QG3HBVH
  Native Command Queuing:          Yes
  Queue Depth:          32
  Removable Media:          No
  Detachable Drive:          No
  BSD Name:          disk1
  Medium Type:          Rotational
  Bay Name:          Bay 1
  Partition Map Type:          GPT (GUID Partition Table)
  S.M.A.R.T. status:          Verified
  Volumes:
disk1s1:
  Capacity:          209.7 MB (209,715,200 bytes)
  BSD Name:          disk1s1
  Content:          EFI
Macintosh HD CPC:
  Capacity:          499.76 GB (499,763,888,128 bytes)
  Available:          318.14 GB (318,138,114,048 bytes)
  Writable:          Yes
  File System:          HFS+
  BSD Name:          disk1s2
  Mount Point:          /
  Content:          Apple_HFS
Thank you for your help
Colin

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