Thanks for all the comments- all good questions. I plan on bringing what I have to the meetup tomorrow, so we can talk it over too.
The paper I'm using is ILFORD B&W: http://www.ilfordphoto.com/Webfiles/2006130200232336.pdf
The moisture issue crossed my mind as well-- I have extra silca gel packets laying around, perhaps I could secure one or two of them inside (in such a way as to not block the light path).
The expansion/contraction thing concerns me - perhaps it is reason enough to switch to a 7/8" cavity to allow for some more wiggle room. I was planning on using black caulk or silicon rubber to adhere the pinhole in position, which may help in its flexibility.
I made a sketchup model of the camera (and pinhole insert), feel free to take a look: http://www.bhs128.com/projects/pinhole/camera.skp