Should Washington reduce the federal insurance that protects the money that Americans deposit in banks and savings and loan institutions?

That's what the President's Council of Economic Advisers is proposing in response to the crisis besetting the country's financial community.Both banks and S&Ls are failing in numbers not seen since the Great Depression. These failures are rapidly eroding the federal funds that insure savings deposits.

If those funds aren't shored up some way, depositors could experience on a national level the kind of problem created by the collapse of Utah's Industrial Loan Guaranty Corp., backer of the Utah thrift and loans that failed in 1986.

Up to a point, a good case can be made for reducing the federal insurance even though a study released a few days ago by the Federal Deposit Insurance Corp. concluded that deposit insurance should be preserved at current levels.

After all, the current coverage ceiling of $100,000 is far above the value of the average thrift account, $7,300. Though deposit insurance discourages runs on weak banks and S&Ls, it also reduces the incentives for depositors to monitor the health of their financial institutions.

Moreover, there are ways to cut deposit insurance without applying a meat cleaver. For example, coverage could be applied only to a certain percentage of an account balance. Britain insures 75 percent of deposits. Also, flat insurance fees paid by thrifts could be replaced by sliding scales based on risk. Institutions with sound policies and capital reserves above legal requirements should pay less.

But after all that has been said, Congress would still do well to find out how much impact there would be on Americans' proclivity to save money before deciding whether or not to curtail deposit insurance.

As it is now, Americans save much less of their disposable personal income than do the British, French, West Germans, Canadians, and Japanese. Because of that low rate of saving, America doesn't always have all the investment capital it needs to build new factories to create new jobs and new income.

To some extent, that gap is filled by infusions of investment from Europe and Japan. But it's dangerous to keep depending on the kindness of strangers to fund America's future growth.

This situation seems likely to persist as long as America remains one of the few major industrial nations without a generally available tax incentive to induce its citizens to save their money. Consequently, if Congress curtails deposit insurance, it should seriously consider providing a tax incentive for savers.

Meanwhile, the recent spate of bank and S&L failures should make one lesson unmistakably clear to all Americans: There is no such thing as a risk-free savings plan.