Just to confirm - did you open output/index.html in a browser? And the "true" that you describe is what you see in your browser...?
Before you ran the webby command, did you edit any of the files, especially content/index.txt? Can you paste the contents of content/index.txt here...?
Did you install RedCloth as well as Webby or did it install automatically as a dependency? If you run the following command, you can see whether RedCloth is installed.
gem list RedCloth
floehopper
2009-02-06 17:59:14