The National Defense Act of 1920 divided the United States Army into three components: the Regular Army, the Militia Bureau, and the Organized Reserve Officer and Enlisted Reserve Corps. The Regular Army was a full-time professional element. The Militia Bureau later evolved into the Army National Guard, and the Organized Reserve Officer and Enlisted Reserve Corps later became known as U. S. Army Reserve. The Act's primary mission was to train civilians for the Militia and Organized Reserve, because supporters of the Act argued that peacetime forces were too small to meet wartime needs. Therefore, the Act stipulated a structure of two National Guard and three Reserve Corps armies, which would provide a force of quickly mobilized citizen-soldiers to supplement the Regular Army during wartime. Peacetime restrictions allowed the Organized Reserve units to fill their enlisted ranks to 33% of their full strength (a standard that many divisions did not achieve in the interwar period). The act also assigned a staff of Regular Army officers and Reserve Officer Training Corps (ROTC) graduates to each Organized Reserve Division.

On August 6, 1921, the War Department authorized the formation of the 103rd Infantry Division, which became one of the Reserve Corps Divisions. The 103rd Infantry Division was one of only three divisions created for the Organized Reserves. In mid-1921, the division was assigned to New Mexico, Arizona, and Colorado and was located in the Eighth Corps Area which also contained Texas and Oklahoma. The National Defense Act of 1920 required Organized Reserve Units to participate in yearly summer training at training centers overseen by the Regular Army. In 1921, the Eighth Corps Training Center Headquarters was located at Fort Sam Houston in Texas. The following year, this headquarters deactivated as the central training location, and after 1922, the summer training centers were housed at Fort Sam Houston (TX), Fort Hauchuca (AZ), and Fort Francis Warren (WY). 

On September 8, 1921, the 103rd Infantry Division established its headquarters at the State Capitol building in Denver, Colorado, and Major James A. McGrath assumed command of the division the following day. Lieutenant Colonel Homer Washburn became the first Reserve officer and the first commander of the 411th Infantry Regiment. The division’s HQ was moved in 1922 to the Kittredge Building in downtown Denver. In 1923, the division's name became "The Cactus Division.” The unit’s insignia consists of a yellow disc with a green Saguaro cactus superimposed upon a patch of blue; the yellow disc represents a golden sky, while the green cactus growing out of the blue sage-covered earth characterizes the southwest United States.

By the end of 1922, the 103rd Infantry Division had 829 Reserve officers and 50 Reserve enlisted personnel. Like many other Organized Reserve divisions, the 103rd Infantry Division struggled to maintain enlisted personnel enrollment throughout the 1920s and 1930s. The Division was usually able to fill its officer ranks to full strength. This happened, in part, because of the relationship between the Reserved Officers’ Training Corps (ROTC) and the Organized Reserves. Each regiment of the 103rd Infantry Division had an affiliation with a specific college’s ROTC program. The 409th’s main ROTC feeder school was the University of Arizona, while the New Mexico Military Institute and New Mexico College of Agriculture and Mechanical Arts supplied officers for the 410th. The main ROTC feeder school for the 411th Infantry Regiment was the Colorado State College of Agriculture and Mechanic Arts. In 1938, 1940, and 1941, the 103rd Infantry Division did not have enough enlisted men or equipment to participate in the Third Army Maneuvers, and the men were instead assigned to other understrength units.

Between World War I and World War II, the Army consisted of divisions that were generally organized in a square design, with four infantry regiments, two brigades, three field artillery regiments, an engineer regiment, Air Service, and special troops. This type of organization with four infantry regiments allowed divisions to be easily separated into two groups to form a brigade. When operational in the field, the division’s two brigades, containing two regiments each, would form a square. For example, the 103rd Infantry Division had two Infantry Brigades under this organization: the 205th Infantry Brigade, composed from the 409th and 410th Infantry Regiments, and the 206th Infantry Brigade, composed from the 411th and 412th Infantry Regiments. Between 1939 and 1942, the Army reorganized its divisions, cutting them from a square design with four regiments into a triangular design with three regiments. The new triangular design provided a great deal of command and control flexibility, as regiments were under the direct control of division headquarters or assigned to a single brigade. The triangular division also provided economy of force, thus allowing for more divisions using the same number of personnel.

While the Regular Army began this reorganization in 1939, the Organized Reserve divisions did not begin reorganizing into triangular divisions until after Pearl Harbor in 1941. The Army called the 103rd Infantry Division to active military service on November 15, 1942 and assigned them to Camp Claiborne, LA. This meant that the triangular reorganization of the 103rd Infantry Division took place at Camp Claiborne. When the division reached Camp Claiborne in 1942, they benefited from Army recruitment and reorganization, gaining more infantrymen. However, in this triangular reorganization, the 103rd Infantry Division lost the 412th Infantry Regiment.