Before the days of modern drywall, walls were built by nailing thin pieces of wood lath side by side across the wall studs, then spreading plaster over them. When that plaster becomes loose and cracked, and starts falling from the lath, it may be time to replace the wall surface entirely with drywall---but that's a major project that you shouldn't undertake until you have to. If the damaged area is isolated to a foot or two, and the lath is still relatively solid, you can re-plaster the area.
Instructions
1. Use your drywall knife to clean up the damaged area. Knock out all the loose plaster and completely expose the lath underneath. If the lath is loose, nail it to the closest stud with trim nails and a hammer.
2. Spread joint drywall compound over the exposed lath in a thin layer, 1/4 or 3/8 inch thick, just enough to cover it completely. Don't worry if there's still space between the pieces of lath.
3. Press paper-style drywall tape over the lath, laying the strips of tape side by side in the compound. Position the strips of tape perpendicular to the direction of the lath, so they span any spaces between the lath.
4. Let the tape set for six or eight hours in the compound. Apply another layer of compound over the first, making it a little thicker, 3/8 to ½ inch, so it starts to build out the surface. Spread it smooth with your drywall knife. Let it dry for eight hours.
5. Repeat the process of spreading layers of compound to build out the surface, letting each thin layer dry before applying the next. Continue until the surface of the damaged area is even with the surrounding plaster.
6. Let the final layer of compound set for 10 hours. Sand it flat and smooth with a drywall sander. Spot-paint the wall.
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