Thanks again to everyone who helped me.
I installed postgresql 7.3 (I had 7.2.3) and it now works! I am not sure what the problem was before.
One thing I did notice was that the postgres driver in /usr/local/aolserver/bin was owned by root.root with permissions 755. I don't know if this had anything to do with it. But on installing 7.3, it was owned by nsadmin. Who should own the darn thing?! And did this have anything to do with the problem or did 7.3 solve it in other, mysterious ways?!
I don't know but it is working!!