The breed was originated by Captain Max von Stephanitz in the late 19th century and early 20th century. His goal was to breed an all-purpose working dog. The first registered GSD was Horand v. Grafrath. Von Stephanitz admired the landrace herding dogs of his native German Empire, and believed they had the potential to be all-purpose working dogs. Additionally, he was aware of the declining need for herding dogs and believed that the working abilities of the breed would decline unless it was put to other uses. Von Stephanitz created the Verein für Deutsche Schäferhunde, or SV as the official governing body for the breed.

The SV then created the schutzhund trial as a breed test for the German Shepherd Dog, and prohibited the breeding of any dog which could not pass the trial. The schutzhund trial, along with the SV's conviction that "German Shepherd breeding is working dog breeding, or it is not German Shepherd breeding" led to a rapid development of the breed's abilities.

After World War I, British and American soldiers, impressed by the abilities of the dog, brought home examples to breed. The breed instantly became popular, both as a family pet and as a working dog.