This WebForm Server friendly form demonstrates how you can create a field that grows to display all of the text entered. This approach is a bit difficult to work with in the Designer because of the need for overlapping items. If WebForm Server is not a requirement you may find the Viewer-only method
Unlike fields, labels have the property of growing to fit their contents. If a label is given the same fixed width as a field, and they reference the same node in the XForms Model, the label should accurately tell us how big the field needs to be to display the field's contents. The sample form does exactly that. To mirror the height of the label, the label and field have to be at the same y coordinate and the field needs to expand relatively bottom-to-bottom of the label. To keep the form dimensions down the label could be placed at the exact same location as the field, but should always be made invisible.
In order to start the field at a default minimum height, the field's itemlocation->expandb2b could be computed so that it expands relative to a spacer when it's value is "" and the label if not "". This has been done in the sample.
So this is not an elegant solution but if it is used sparingly it shouldn't be too difficult to maintain a form containing the hidden labels and spacers required by this approach.