In 1976 George Lucas was in the process of finishing his film Star Wars. It was late in the day and the film was in post-production. Lucas was deeply unhappy with the cantina sequence he'd already filmed in London, and had run out of money. He originally conceived the sequence as a deep space version of Dante's Inferno, but as it stood it looked more like Beatrix Potter. It just wasn't exotic enough and Lucas was desperate to make the scene work. The studio reluctantly gave Lucas $20,000 to finish his film.
Lucas hired Dan O'Bannon to design the computer graphics used in the movie, who in turn recommended Ron Cobb. Three designs for the cantina creatures were used, all of which featured prominantly in the scene.