Some of the founding Shepherd's were white! The foundation stud, Grief, was white. The creator of the breed is on record saying that white dogs have no less working capacity than any other color... So what happened?
Turns out, this was due largely to nazi influence, too. The WWII era really transformed the German Shepherd. From a pastoral sheep-herding companion came a military machine. White dogs, while good at blending in with the flock and being spotted by a Shepherd in the field, were not so good on the battlefield, unfortunately for the same reasons. You can see them coming at night, they are easy targets on a black mountainside.
In other words, the ideas of the time have an ENORMOUS impact on the dogs we create. I don't doubt the Giant Schnauzer story for a second. Breeds evolve to suit the government, the people, and the culture that they are born into...