The vitamin A metabolite retinoic acid has been implicated as an important signaling molecule needed for development of the central nervous system. Previous studies have demonstrated clear roles for retinoic acid in regulating genes needed for generation of motor neurons in the hindbrain and spinal cord, but the role of retinoic acid in the forebrain has remained elusive. Here, we investigate mice lacking the ability to metabolize vitamin A to retinoic acid in the forebrain. Although no defects were observed in generation of cortical neurons that process most information in the forebrain, we did observe a serious deficiency of one type of neuron that provides inhibitory input to cortical neurons, i.e. GABAergic neurons. Our studies demonstrate that retinoic acid is required for specific forebrain neurons to activate an enzyme that converts glutamate to the inhibitory neurotransmitter GABA. We also found that retinoic acid treatment of human embryonic stem cells was able to stimulate production of GABAergic neurons. Deficiencies in GABAergic neurons have been associated with several neurological disorders including Huntington’s disease, autism, schizophrenia, bipolar depression, and epilepsy. Knowledge of how GABAergic neurons are generated may aid efforts to treat these diseases.