When Genesis reconvened to record "We Can't Dance," all three members were already fairly deep into their solo careers. The upshot was that, having used their ideas elsewhere, all three musicians showed up for the recording sessions with no real ideas for the Genesis record. "We started this album with absolutely nothing," Collins was quoted in Ultimate Classic Rock. "It was just us going into the studio and improvising our way around. There are no rules."
Often this meant taking inspiration from whatever was around — including television commercials. Reportedly, the group was inspired by a Levi's jeans commercial that featured the Clash song "Should I Stay or Should I Go" (you can watch it on YouTube here). Guitarist Mike Rutherford started playing the riff from the Clash number, but slowed it down and gave it a bit of a swing; at some point, Collins spontaneously came up with the line "I can't dance." And suddenly, the song had both a riff and a hook.
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