The problem with interior bracing is that it usually does not connect with the floor structure as well as exterior sheathing which can overlap and be nailed to the perimeter band joist of the floor framing. Remember, lateral bracing depends more on fasteners than on the strength of the panels and if the forces are not transmitted to the foundation you have achieved nothing.

To get effective results from interior panels (5/8" drywall is pretty effective) you need to add tie down brackets at the base of the wall studs (see Simpson catalog). Adding bracing is most effective at the corners where the greatest lateral forces occur. Tie down brackets at the studs near the corners and 5/8" drywall or diagonal steel braces will probably be enough unless you are in earthquake or hurricane territory and, if so, you need to hire an engineer.

The basic reason for using sheetrock is for fire retardation. Plaster was originally used, but became too expensive when sheet rock was perfected.

So, adding a wood based sheathing will violate fire codes and make the room a combustable nightmare.

The better long term fix is what mightyanvil recommended.

If the goal is to increase resistance to racking forces you may get some benefit from plywood sheathing on the interior.

Tie downs resist lateral translation and overturning forces.

The attached link is an online seismic bracing guide that does a fair job of explaining the mechanisms for seismic bracing and also has some tables on the required nailing patterns and sizes for a number of systems. (dial-up warning the file is ~9 megs).

Note that for 2-story dwellings they recommend panel bracing on both faces of the 1st floor exterior walls. That is to increase the racking resistance at the base level.

Hope this helps.

Here is a link that might be useful: seismic bracing guide

Thanks for the advice. I will also be laying wallboard over the plywood sheathing. I did not mean for the plywood to be the final finished surface. Is that still a fire hazard?

As for transferring lateral fores to the foundation in an earthquake (I live in San Jose, California), my house IS bolted to the foundation, and it is only one story.

But IÂm primarily adding the plywood to eliminate cracks that develop over time in the wallboard. Since the foundation is ok, I assume that the next most likely reason for the cracks is underframing and insufficient bracing against lateral forces and seasonal expansion/contraction of the houseÂs wood frame.

There is no fire protection issue involved except that you must cover plastic foam insulation with drywall.

If your lower house is designed to be sufficiently tied to the foundation to resist earthquake uplift forces then the superstructure should have been designed to be stiff enough to tolerate those forces. If not, the house would be damaged in an earthquake regardless of the strength of the tie downs. Think of earthquake damage as being the result of the foundation moving rapidly back and forth and the house frame not being stiff enough to resist those lateral forces and collapsing. If the frame is not stiff enough to survive the earthquake, the earthquake tie downs are essentially useless.

Unless the lateral force resistance was designed by an amateur, I would be looking for another reason for the cracking. Do you have photographs?