In order for Snow Leopard's new auto-correction feature to work, you need to have both "Correct spelling automatically" and "Check spelling while typing" enabled under Edit » Spelling and Grammar. I searched in the OS help files and online, and I couldn't find any documentation that actually stated this. In fact, TextEdit's Help says:
To have TextEdit automatically correct spelling errors, do one of the following:Logically, this hint is pretty obvious: the system won't auto-correct if it's not checking while typing. However, allowing "Correct spelling automatically" to be checked and then having nothing happen is confusing behavior for users. It seems to me that a better behavior would be to have the option grayed out unless "Check spelling while typing" is checked.
- To automatically correct spelling in the current document, choose Edit > "Spelling and Grammar" > Correct Spelling Automatically.
- To automatically correct spelling in new documents, choose TextEdit > Preferences, click New Document, and select "Correct spelling automatically."
Mac OS X Hints
http://hints.macworld.com/article.php?story=20091004165825511