The Carolina shag was created in the 1930's during the time when the Jim Crow laws were at large. These laws prevented whites and blacks from integrating.
Two teens, Billy Jeffers and "Chicken" Hicks, attended an African American nightclub and studied their dances. They made the Carolina shag based on a mix between black and white dance moves.
In the 1960's, couples dancing, including the Shag, grew less and less popular. This was partially due to the fact that rock and roll had replaced R&B as the popular music of that day.
The Carolina Shag is done primarily in the Southern States such as Florida, the Carolina's, Virginia, Georgia, etc. It is popular since it feels very smooth, and the two partners seem to connect over the dance and the music.