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The compact was the fruit of several years of negotiations among the states. The seven states had previously formed the League of the Southwest in 1917 to promote development along the river. In 1921, Congress authorized the states to enter into a compact for allocation of the river resources. The agreement was approved by Congress in 1922, the same year it was signed. Colorado River Compact was signed by the delegates from the seven Colorado River Basin states: Wyoming, Colorado, Utah and New Mexico were designated Upper Basin states and California, Arizona and Nevada as the Lower Basin states. This compact determined that the water would be shared equally among the upper and lower basin states. Prior to the compact, the name of the river was standardized along its length. Previously the portion of the river upstream from its confluence with the Green River had been known locally as the "Grand River". The change was opposed by many local residents in Utah and Colorado, and the new name was enforced locally by acts of the state legislatures in both states in the early 1920s. One of the major concerns both today and back in the 1920s was the expanding population, and this increased the demand for water, particularly in California. In more recent years, mainly because of Las Vegas, Nevada has been looking for more use of the Colorado River.

In 1934, Arizona, unhappy with California's decision to dam and divert the river, called out the National Guard and even commissioned a two boat "navy." The matter was eventually settled in court.

The agreement was controversial even at the time, however. Arizona, for example, was dissatisfied with the lower basin allotment. Led by Fred Colter, the state refused to sign the agreement, and did not do so until two months after Colter's death in 1944. The specific allotments were disputed by Arizona until the United States Supreme Court upheld the amount in the 1963 decision in Arizona v. California. The agreement ended many years of dispute, clearing the way for the Central Arizona Project, authorized by Congress in 1968. Mexico was able to gain some of the river rights, Arizona took steps to protect its water rights and keep from California gaining too large of a share, which ultimately lead to the Arizona v. California supreme Court Case. The Arizona v. Colorado court case lasted 11 years and cost over $5 million and 50 lawyers. This case set the precedent of SCOTus using water rights. The case ultimately decided that the Boulder Canyon Provision was correct for the lower states (which are California, Nevada, and Arizona). The Court ultimately ruled in favor of Arizona, however they agreed with the way that California interpreted that it got surplus water was correct and so there was essentially some compromise on both sides.

Development was the prime concern of the Colorado River Compact, when signed in 1922. Using and reusing the river water as well as frequent damming results in an unfavorable environment for native fish species. Dams block fish passage, reduce natural silt deposition along flood plains and in deltas, and change water temperatures—all negatively impacting the natural ecosystem.[14] The high water usage has also caused the river delta, located in Mexico, to significantly deteriorate. Once a lush and green area from the high amounts of silt deposit, the plentiful ecosystem has now all but disappeared. The Colorado River had been over allocated since the beginning of its time, as during the during the signing of the Colorado River Compact, the flows were vastly overestimated and much more generous than they should have been. It was originally estimated to have 17 million acre-feet a year, but even prior to the drought flows have often been less than a third of that.