Michael,
I, like most other stock removal types, do the grind and dip method, so to speak. Even the fellows that forge still have to grind and polish their blades.
As far as being able to get the steel too hot, there are work hardenable steels such as Cruwear (Crucible's answer to Vascowear and still available I may add). I have had the misfortune to get it too hot while grinding and it gets so hard that trying to grind it any further is useless, it just knocks the grit right off of the belts. In essense, you must dissipate the heat some how on some steels. It makes it easier on the fingers as well.
As far as a constant stream or a bath of water being used, the only application that I am aware is the lapidary process when dealing with rocks or stones.
In the machine tool industry, some applications require the necessity of a cutting and/or cooling fluid while machining parts. This saves on tool life.
CLWilkins