Another alternative for more natural baby clothes is to simply buy used clothes! These will not be organic usually, but since they have been worn and washed many times, the formaldehyde and other chemicals will likely have been washed out, and the fabric will be softer.
Buying used also has environmental benefits. The longer each item is kept in use, the fewer items have to be manufactured at all, which does cut down on pollution from their production.
Obviously, the ideal from an environmental standpoint would be organic baby things that are then reused for several babies. But if your budget doesn't permit you to buy organic, buying used (at thrift stores and consignment stores and special sales) is a great alternative.