Dad used to say that when I was a kid. In usage it was like saying, ‘Bang! You’re dead!’ I was reading a WWII book a while ago (I don’t remember which one) where ‘faded’ was mentioned once; but I got the impression that it meant to be dead. (e.g., Lt. McGhostly got in front of an ME and he was faded.) I can see the symbolism: As someone dies, he may ‘fade away’. Or a ghost may fade away.
But where did the phrase originate? A film? Comic book? Song? When did it originate?
On second thought, MacArthur is probably not the source. He said this quote at his retirement, well after WWII, the time of your story. In his quote he mentions an old ballad (this is the best I can find of that), perhaps both the story and his quote would be traced to the same source. In looking for the lyrics, I ran across some info that said that this was a popular song in barracks and dated back to WWI. I can’t remember now which sites said that, but if you like I can look again. Still not very pulpy, though. All in all, not much help, but maybe a start?
I have a memory of “You’re faded” meaning that someone’s offered bet was accepted. I tried to google for it, but the “faded+gambling” brings up about three quarters of a billion online casinos and I couldn’t separate the wheat from the chaff.
If it does tie back to a gambing term it might refer to a lost bet.