Back in the late 1600's, the Dutch invented the two-sheet mold. The average maximum stretch of an experienced vatman's arms was 44". Many molds at that time were around 17" front to back because the laid lines and watermarks had to run from left to right. Sounds big?...well to maximize the efficiency of paper making, a sheet this big was made, and then quartered, forming four 8.5" x 11" pieces.
This was well before paper machines dominated hand made paper labor. A couple centuries later when machines dominated the trade (although many hand made paper makers still existed), and the United States decided on a standard paper size, they stuck with the same size so as to keep the hand made paper makers in business.
Oddly enough, the United States used two different sizes - the 8" x 10.5" and the 8.5" x 11". Separate committees came up with separate standards, the 8" x 10.5" for the government and the 8.5" x 11" for the rest of us. Once these committees found out about each other a couple years later, they agreed to disagree until the early 1980's when Reagan finally proclaimed that the 8.5" x 11" was the official standard sized paper.
Read full article here: http://www.afandpa.org/paper.aspx?id=511
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