Ag on Si(111)-7×7 was one of the first systems where height selection of metal islands was attributed to electron confinement, i.e., stabilization of selected heights through a quantum size effect (QSE). However, it has been puzzling how the requisite electron standing waves can form, because the Fermi level E_F (along the growth [111] direction) is within the gap for bulk Ag. With detailed experiments over a wide coverage and temperature range, we show that a large increase of 12% is present in the interlayer spacing within the bilayer islands. This can shift E_F below the gap, allowing electron confinement to control height selection. This conclusion is also supported by the observation of a corrugation pattern of period 3 nm on top of the Ag islands, which is bias dependent and can only be the result of QSE-generated standing waves normal to the film.