When I last took my commute bike for a service I think I remember the mechanic mentioning to someone in the shop that a spacer should go above the stem.
Ok. I've put one of the spacers above the stem now. I may have overtightened the headset as it now creaks in a worrying fashion. However if it holds till I get home, I can strip it down again and have another go at it.
Sounds to me like you've overtightened at some point, and now your bearings are shot. Headsets are not meant to be done up very tight, just tight 'enough'. It's an art born of experience to know how tight is 'enough'.
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