Lobbying, basically. When you have a product that grows easily, is durable, and kick's wood pulp's butt at paper production, you're going to make some enemies in high places (Specifically, William Randolph Hearst). The fact that it was stereotyped as a dirty Mexican drug (by guess who?) sure helped with public perception.
So yeah, lobbying and racism mostly. It can still be grown in 9 states with the proper licensing, but that's not easy to get.
Edit: Don't let anybody try to sell you on hemp clothing though. I know it's durable as hell and can be passed down easily, but it's just not as comfortable as cotton.