Glycine and γ-aminobutyric acid (GABA) are depolarizing during early development but the purpose is unclear. We tested the effect of altering glycine signaling in zebrafish embryos by overexpressing the potassium-chloride co-transporter type 2 (KCC2) to reverse the chloride gradient or by blocking glycine receptors with strychnine or by selectively knocking down the embryonic glycine receptor (GlyR KD). Using a variety of markers we observed in all three cases a reduction of all types of spinal interneuron populations examined, indicating that glycine modulates their overall differentiation rather than choice of cell fate. Other cell populations (motor, sensory, and glial cells) were unaffected. As glycine appeared to act preceding neural and synaptic development, we examined the bandoneon (beo) mutant in which glycine receptors are functional but not clustered at synapses. Neural populations in beo embryos appeared normal, suggesting a paracrine action of circulating glycine in promoting interneuron differentiation.