Thank God for stackoverflow.com (13 jan 13)
Whatever the problem, Stack Overflow has the answer.
I created a new Rails 3.2.11 app, created a new gemset and a .rvmrc file for RVM, made sure that my 'rails' executable script was in RVM and version 3.2.11, then I ran
$ rails server
Instead of telling me its running at localhost:3000, it told me how to use it:
Usage: rails new APP_PATH [options]
The solution was to enter
$ rails new .
then
$ rails server
Well I never!