Children use pronouns in their speech from the earliest word combinations. Yet, it is not clear from these early utterances whether they understand that pronouns are used as substitutes for nouns and entities in the discourse. The aim of this study was to examine whether young children understand the anaphoric function of pronouns, focusing on the interpretation of the pronoun it in English-speaking children at 1;6 and 2;0. We tested whether adults and children would prefer to look at a previously introduced vs. novel visual object depending on the argument form ("it," "the + noun," "a + noun," or silence). Results demonstrate that, like adults, two-year-olds understand that it refers to a previously introduced referent. There is no evidence that this knowledge is established in children at 1;6. This suggests that some time between 1;6 and 2;0 children come to understand that it refers to a highly accessible referent introduced in the prior context.