The cortical hem is an embryonic signaling center that generates bone morphogenetic proteins (BMPs) and acts as an organizer for the hippocampus. The role of BMP signaling in hippocampal neurogenesis, however, has not been established. We therefore generated mice that were deficient in Bmpr1b constitutively, and deficient in Bmpr1a conditionally in the dorsal telencephalon. In double mutant male and female mice, the dentate gyrus (DG) was dramatically smaller than in control mice, reflecting decreased production of granule neurons at the peak period of DG neurogenesis. Additionally, the pool of cells that generates new DG neurons throughout life was reduced, commensurate with the smaller size of the DG. Effects of diminished BMP signaling on the cortical hem were at least partly responsible for these defects in DG development. Reduction of the DG and its major extrinsic output to CA3 raised the possibility that the DG was functionally compromised. We therefore looked for behavioral deficits in double mutants and found that the mice were less responsive to fear- or anxiety-provoking stimuli, whether the association of the stimulus with fear or anxiety was learned or innate. Given that no anatomical defects appeared in the double mutant telencephalon outside the DG, our observations support a growing literature that implicates the hippocampus in circuitry mediating fear and anxiety. Our results additionally indicate a requirement for BMP signaling in generating the dorsalmost neuronal lineage of the telencephalon, DG granule neurons, and in the development of the stem cell niche that makes neurons in the adult hippocampus.