Rubygems creates only /usr/bin/gem1.8 so you should create a soft link like this: ln -s /usr/bin/gem1.8 /usr/bin/gem
Type gem install rails -V and wait.
Now you are ready to start your rails app on nokia n900!
Just run ruby script/server in your project folder. To create a project folder use rails my_app as usual.
Your server may not start if you miss libopenssl-ruby. In this case you get an error about net/https: apt-get install libopenssl-ruby.