The German Shepherd fact page on Yahoo! Pets notes that these dogs have long been valued for their strength and intelligence, two important factors in any type of guide dog.
The first German Shepherd breeding club was established in 1899, so it's a relatively recent breed. The dog was originally intended as a herder, but was quickly promoted as a guide and police dog by its breeding club, the Verein für Deutsche Schäferhunde (VS). This group bred the dog assiduously, promoting "utility and intelligence," and trained it for "tracking, obedience, and protection." These traits helped convince the German government to use the dog for military purposes and make them ideal companions for police officers today.
The two world wars cemented the dog's reputation as a police or military breed, and the FAQ in the Yahoo! German Shepherd category notes that the German army used these canines during both wars. American soldiers returning home from Europe were primarily responsible for the breed's popularity in the States. Perhaps the most famous German Shepherd of them all, Rin Tin Tin, was brought to America from Germany after World War I by an American soldier.