A role for endocannabinoid signaling in neuronal morphogenesis as the brain develops has recently been suggested. Here we used the developing somatosensory circuit as a model system to examine the role of endocannabinoid signaling in neural circuit formation. We first show that a deficiency in cannabinoid receptor type 1 (CB1R), but not G-protein-coupled receptor 55 (GPR55), leads to aberrant fasciculation and pathfinding in both corticothalamic and thalamocortical axons despite normal target recognition. Next, we localized CB1R expression to developing corticothalamic projections and found little if any expression in thalamocortical axons, using a newly established reporter mouse expressing GFP in thalamocortical projections. A similar thalamocortical projection phenotype was observed following removal of CB1R from cortical principal neurons, clearly demonstrating that CB1R in corticothalamic axons was required to instruct their complimentary connections, thalamocortical axons. When reciprocal thalamic and cortical connections meet, CB1R-containing corticothalamic axons are intimately associated with elongating thalamocortical projections containing DGLβ, a 2-arachidonoyl glycerol (2-AG) synthesizing enzyme. Thus, 2-AG produced in thalamocortical axons and acting at CB1Rs on corticothalamic axons is likely to modulate axonal patterning. The presence of monoglyceride lipase, a 2-AG degrading enzyme, in both thalamocortical and corticothalamic tracts probably serves to restrict 2-AG availability. In summary, our study provides strong evidence that endocannabinoids are a modulator for the proposed ‘handshake’ interactions between corticothalamic and thalamocortical axons, especially for fasciculation. These findings are important in understanding the long-term consequences of alterations in CB1R activity during development, a potential etiology for the mental health disorders linked to prenatal cannabis use.