Robert Hunter wrote the lyrics, as he did with many Dead songs, although Garcia wrote the line, "Light a candle, curse the glare." This is according to the book Box Of Rain, which was written by Hunter and is a collection of his published songs. In the book, it is "A Touch of Grey" and has an asterisk next to the line Jerry wrote. There is no definite reasoning for the song - many feel it's about aging, but many also feel it's about all the drugs they've done. (thanks, Eric - Houston, TX)
The Mighty Diamonds covered this in 1996 on Fire On The Mountain, an album of Reggae versions of Grateful Dead songs.
According to David Dodd in The Annotated Grateful Dead Lyrics, the line "Light a Candle, curse the glare" is a play on Adlai Stevenson's 1962 reference to Eleanor Roosevelt's death. He said, "She would rather light a candle than curse the darkness." The line, "The Ables and the Bakers and the Cs" refers to the first two words in an older version of the military communication alphabet, "Able" and "Baker." The modern version starts with "Alpha" and "Bravo." (thanks, Amy - Chicago, IL, for above 2)
The song is about the band aging gracefully. The phrase "Touch Of Grey" is a reference to getting older. For most people, their hair starts getting grey as they age.
This was The Grateful Dead's first and only hit song. They had a huge following and were never concerned with chart hits. They didn't have to be because their albums sold well and their tours sold very well.
They made a video for this, which was the first one they made for MTV. They shot it during a concert at Laguna Seca Raceway in California, which let them use a real audience. The video shows the band playing the song as skeleton puppets. At the end, they transform into the real band members.
At their famous live shows, the band refused to capitalize on the commercial success of this song. Even though it was a hit, band members wouldn't play it at many of their concerts. (thanks, Mike - Mountlake Terrace, Washington - USA)