More'n'likely your suggestion would be an excellent idea for all concerned- either cellulose or fiberglass. You might best consult local insulation contractors for specifics, and for clues as to what might be done inside the wall cavities.
For house of that vintage, you can likely also see great returns on improving windows, sealing, and heating equipment. Can't see from here which would give you the fastest payback and thus should be done first. If you use the AC much, regular professional checkup would benefit you, too.
Since gas and oil will only continue to rise in price, the payback picture for any serious conservation measure can only continue to improve.
As an alternative, wood-pellets may, if supply/demand ever settle out, rise more slowly. (If you can find reliable supplier.) And, they're renewable. Significant initial investment.
If your furnace is worth keeping (to you), you might do well to look to automatic stack damper, and clock t-stat.
HTH, J