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 EF (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 EF 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.