catmount, you got the general idea.
Yes, the fuse is intended to protect the wire AND to a certain point, the load (whatever is connected to it). I say to a certain point, because it protects the load to faults (short citcuits) outside of the load itself. It will not protect the load from internal faults.
Also, the fuse size is NOT based or related to the the wire size/gauge. The fuse size depends on the amperage of the load that is connected to it. Say you have a lighting load that draws 5 Amps. According to wire ampacity tables http://www.ancorproducts.com/support..._Amperage.html
you can wire it with #18AWG (if less than 3 conductors and not taking into account wire length), which will give you 20 Amps outside engine areas, but your fuse will have to be a 5 Amps fuse at a minimum. However, recommended practices call for a fuse or breaker to operate at 75-80% of it's rated capacity. So 5Amps + 20% = 6 Amps, so you would have to go with the next size up which is 7.5 Amp fuse.
Also, please first look at the recommendation of the equipment manufacturer as to wire size & fuse size. When you are talking about electric motors (pumps, cooling/heating equipment, windlass, etc) the protection requirement is much higher. A respectable manufacturer will tell you what wire & fuse size to use.
As to why starting on the battery, because that's where you have all your enegy stored onboard. Say you accidentally short the wires on a battery, if the fuse is not in place, the short circuit will continue until the battery depletes it's energy, and once again we go back to the big bonfire thing
Think of it as the lock on your front door, you have to start protecting from the very begining.
Just to give you a good idea of the energy dissipated on a short citcuit:
- the fire you see is caused by the oil inside the transformer that escapes under pressure and gets ignited
And just in case you thought that it only happens at high voltages, here is a 480V short circuit...the lower the voltage, the higher the current.
Serious stuff, so take electrical systems seriously. Be safe please.