How Were Trade Tokens Used?

What I heard (read: pure conjecture I can not back up) businesses would use them as a cash back program to encourage shopping at their location.

You would get your $1.50 and a 5 cent off bread loaf token.

In Canada we have Canadian Tire "Money" at that is how it works.

Thank you for asking the question as I have wondered this too. I am tracking down some local lumber tokens.

This is interesting.
Back then I would think you would get the correct amount in exchange and a token to redeem for future use.
Lets look at the time frame as the OP posted.

Some locations had banks, but those banks sometimes purchased what was available which might not include all denominations. They might get a ton of dimes, but only a handful of quarters.

Merchant tokens were used in the 1830's and 1860's because there was virtually no circulating coinage. Later, tokens were used more for promotional purposes. A tobacco store often used tokens valued at 6 1/4 cents - the cost of a cigar, or 3 such tokens would make change for a quarter.

12 states issued tokens, too. Guess why?

I can't say what happened in North America in the 1800s to 1900s but in Britain, trade token circulation was usually limited to one town or one owner's or company's factories.

Generally the factories were situated where there was no competition from other shops or working hours were structured so that non-owned shops would be closed by the time workers left.

Change was always given as tokens which could only be spent in the company's shops (other shops could not redeem them so would not accept them). Prices in the company's shops were higher than in other shops which gave the company extra profits.