Food in a dish or container is set into a larger dish or container. All dishes used are ovenproof. The larger container is filled with hot or boiling water so that the water comes about halfway up the side of the smaller dish in which the food is. Surrounding the food with water helps keep the cooking temperature even and moderate. This is useful for touchy items being made such as custards and cheesecakes, and especially any items containing eggs.
To get a water bath going, boil water in a kettle. Open the oven, pull out the rack. Place the two dishes on the rack, and fill the larger dish with the boiling water from the kettle. Gently slide the rack back in and close the oven.
Because water evaporates when it reaches the boiling point, the temperature that surrounds your food will never surpass the boiling point. To alert you when the water is about to dry out, place the metal top of a jar right side up on the water so that it floats. When the water is low enough that it actually starts to fizzle in the pan, the jar top will rattle and make noise, alerting you that it's time to top up the water.
Water baths can also be used to melt chocolate or keep sauces warm.
Many food writers will refer to this as "bain marie", but "water bath" is a perfectly good English expression. Never use foreign terms when a perfectly good English word will do. People might think you are showing off.
Bain-Marie means Mary's bath. It is a French expression that comes from the Latin, "balneum Mariae". Maria was an alchemist, probably 1st century AD, none of whose writings survived on their own, but survived quoted by other writers. Maria created a metal alloy called "Mary's Black", the first distilling apparatus as we know it, and the "bain-marie" technique. While her purpose was of course to control temperatures in a laboratory for alchemy experiments, her distilling and bain-marie techniques have gone onto other culinary uses as well.
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Bain Marie; (French); Wasserbad (German); Bagnomaria (Italian); Baño María (Spanish)