Stern was born in Wyalusing, Pennsylvania into a family of humble means. His Pennsylvania-born father was a traveling merchant of Bavarian descent, who came to Wyalusing from West Virginia with his New Jersey-born wife. Stern grew up in Brooklyn, New York and New Jersey, and graduated from Rutgers University before becoming an author of some 40 books and editor most known for his books on the Civil War that a New York Times obituary called "authoritative" and "widely respected by scholars".
Inspired by a dream, Stern published a 4,000-word short story called "The Greatest Gift" in 1943 after working on it since the late 1930s but, unable to find a publisher, he sent the 200 copies he had printed to friends as Christmas cards in December 1943. One of the pamphlets came to the attention of RKO Pictures producer David Hempstead, who showed it to actor Cary Grant, who was interested in playing the lead role. RKO purchased the motion picture rights for $10,000 in April 1944. After several screenwriters worked on adaptations, RKO sold the rights to the story in 1945 to Frank Capra's production company for the same $10,000, which he adapted into It's a Wonderful Life.
The story was first published as a book in December 1944, with illustrations by Rafaello Busoni. Stern also sold it to Reader's Scope magazine, which published the story in its December 1944 issue, and to the magazine Good Housekeeping, which published it under the title "The Man Who Was Never Born" in its January 1945 issue (published in December 1944).