Try running
rails -v
from the console to confirm what version of Rails you're on.
It sounds like you're running a rails 2.x application, correct? That should mean that you're serving images, js etc from the /public directory. One important gotcha that tripped me up setting background images in css is that the paths you specify are relative to the directory the stylesheet is in(e.g /public/stylesheets), not the root directory of the project itself.
Have you tried changing the path to go up one directory from where the stylesheet is located?
.head {
background-image: url(../images/background_image.jpg);
width: 100%;
height: auto;
}
EDIT: What other paths to the bg image have you tried?
Some other possibilities could be:
background-image: url(images/background_image.jpg);
background-image: url('../images/background_image.jpg');
One other thing to check would be to load the view and examine the div in Google Chrome using the inspector (Ctrl Shift + I). Select the div and examine the styles Chrome is assigning to it.
Also, double check that it's still named background_image.jpg Can't tell you how many times I've gotten burned by some typo I overlooked ;)