inflicting it, whereas too large a coalition would have undermined the information flows required for the credibility of the punishment. Similarly, for the Hansa to be effective, it had be sufficiently large to ensure that the German merchants would not be marginal.
The timing of the emergence of guilds was therefore related therefore to population growth and the processes that lead to the formation and internal organization of cities. In Southern Europe the major Italian city-states grew large because of social and political events around the Mediterranean. Italian trade expanded because each city functioned as a merchant guild of sufficient size that its traders were not marginal. Their property rights were hence secured.
Although the potential gains from trade in the Baltic Sea were substantial as well, that region's settlement pattern—influenced by the Germanic military expansion eastward—produced small towns that could not ensure the safety of their traders abroad. Only after a long process of urban expansion and institutional evolution were these towns incorporated into an intercity merchant guild, the German Hansa, that enabled Baltic trade to prosper.
Although the guild was a precondition for trade expansion, its rise in Europe was not caused by the new gains from trade. Rather, its rise in various localities reflects the nature of institutional dynamics as a historical process. The ways in which the various guilds were organized and the timing of their rise—and hence of trade expansion—were determined by social, economic, and political processes through which institutional elements and other conditions required for a guild’s functioning were crystallized.
This historical analysis supports the hypothesis that the merchant guild organization was at the center of an institution that overcame the ruler's commitment problem and facilitated trade expansion. Although these organizations exhibited a range of administrative forms—from subdivision of a city administration (such as that of the Italian city-states) to the intercity organization of the Hansa—their functions were the same: to provide the coordination and internal enforcement required to enable the beliefs required to surmount the commitment problem. The actions taken by rulers and traders, their strategies as reflected in their regulations, and the expansion of trade that followed the establishment of guild organizations all confirm the importance of this role of the guild organization.