The term tooth fairy denotes a fairy believed by children to take away milk teeth and leave a small sum of money or a small gift under the child’s pillow.
The earliest instance that I have found is from the Practical Housekeeper’s Own Page, in The Chicago Sunday Tribune (Chicago, Illinois) of 27th September 1908:
Many a refractory child will allow a loose tooth to be removed if he knows about the tooth fairy. If he takes his little tooth and puts it under the pillow when he goes to bed the tooth fairy will come in the night and take it away, and in its place will leave some little gift. It is a nice plan for mothers to visit the 5 cent counter and lay in a supply of articles to be used on such occasions.