Primitive peoples believe that hair, nail clippings, and lost teeth remain magically linked to the owner even after they have been disconnected from his body. As any voodoo artist will tell you, if you want to grind someone into powder, you don't need to touch him at all. It's quite enough to stamp on a missing molar and let "contagious magic" do the rest. This is why peoples all over the world traditionally hide lost body parts, lest they fall into the wrong hands.
American children's ritual of hiding lost teeth under their pillows probably derives distantly from this practice. But there is an obvious difference, for when Suzie conceals her baby milk-tooth, she fully expects it to be found, and by a good magician, not an evil one. Moreover, she expects to be paid for having surrendered it, and at the going rate. Nothing mare clearly suggests the blithe commercial gusto of our culture than this transformation of a fearful superstition into a cheery business transaction.
Because American children expect fair exchange for their lost teeth, it is likely that the tooth fairy ritual derives more immediately from the European, and particularly German, tradition of placing a lost tooth in a mouse or a rat hole.The folk belief governing this practice is that when a new tooth grows in, it will possess the dental qualities, not of the original, lost tooth, but of whatever creature finds it, so the creatures of choice would be those world-class champers, the rodents.
Thus the optimistic, "fair exchange" principle most likely started in Germany and was brought here by German immigrants. It was only left to America to replace the beneficent “tooth rat” with the more agreeable fairy and to replace the traditional hope of hard molars with our more characteristic hope of hard cash.