Dollaw sign quoting disabled

It appears that in my installation of Postgres that dollaw sign quoting
is disabled. For example, the following command returns an error:

CREATE or replace FUNCTION add_em(int, int) RETURNS integer AS $$
SELECT $1 + $2;
$$ LANGUAGE SQL;

The error:

psql:borman.sql:6: ERROR: syntax error at or near "$" at character 72
psql:borman.sql:7: ERROR: syntax error at or near "$" at character 1

Putting something between the dollar signs (e.g. $FUNCTION$) produces
the same error. Using regular quotes works, however:

CREATE or replace FUNCTION add_em(int, int) RETURNS integer AS '
SELECT $1 + $2;
' LANGUAGE SQL;

CREATE FUNCTION

I didn't do anything (that I know of) to disable dollar quoting. Any
advice on how to enable dollar sign quoting?