Don: You are right. Water/methanol injection was used extensively, especially by the Germans, in WWII to allow extra boost without destructive detonation. The allies had 100- and later 150-octane (believe it or not) gasoline, courtesy of the Ethyl Corp., and could run boost pressures impossible in German engines, who were mostly restricted to 87 octane (although some benzene blends were higher).
A year before the Battle of Britain, British aero engine fuel stocks were of the same 87 octane. Arrangements were made with Standard Oil of Ohio (Esso) to supply the new 100-octane, and the 87-octane stocks were replaced with this new gas, which allowed the Merlin's 6 - 7 lb. boost to be immediately raised to 12 lb. At the outbreak of war the Neutrality Act forbade any more supplies until an "arrangement" was reached which allowed the prohibiton to be evaded. Together with the constant-speed airscrew (replacing the 2-blade fixed-pitch one), this resulted in a significant increase in maximum speed and climb rate.
The only answer by Daimler-Benz and BMW was water/methanol injection, which could only be used for short "emergency overboost" spurts, and by steadily increasing the volume of their engines. For example, the BMW engine of the Fw190, at 45 litres, was little more powerful than the Merlin at 27.
The purpose of the methanol was to prevent freezing of the water at high altitude. A slight extra HP increase was achieved from the steam generated by the water.
Water-injection has historically been used in aviation to increase jet engine thrust and to reduce the emissions of oxides of nitrogen (NOx). The effect is to reduce specific fuel consumption (SFC), NOx emissions, and engine hot-section temperatures while maintaining constant thrust. The subsequent reduction in hot-section temperatures increases engine life and reduces maintenance costs. So the next time the pilot throttles the turbines of the B 767 you're sitting in, some of the push you feel in your back is coming from tap water.