Can the rotting cloth insulation on a generator armature be saved by using a coat of varnish to reinsulate?
That insulation is on the field coils normally and not the armature. You can probably get the insulation tape through an automotive electrical shop that rebuilds starters, generators and alternators or maybe a shop that rewinds AC electrical motors. You probably will need to either take the coils out or have them taken out and re-insulated. If you don't have a local source contact these guys. http://www.smithae.com/ They are in Yakima and the owner is into old cars. I use them quite a bit and buy almost all of my alternator and starter rebuild pieces from them. Also they are used to doing work on stuff that is shipped in UPS or via mail and having a good turnaround time.
First you need to check that their is no continuity between the internal shaft and the commutater ( the copper bit the brushes run on). If that is ok I used to heat em in an oven, dip em in varnish then put em back in the hot oven to bake. Make sure to turn the oven off before putting them back in or the door can blow open! Next day clean the shafts in the lathe and retest.
For the price of a used generator, I'd just pick up another one. This is just as old as yours and shows no signs of degradation. The never come apart in the garage. JMO