To me, either version is OK in English because "can" carries both meanings (to be able to something -- savoir, and to have the opportunity to do somtehing -- pouvoir).
"I can read" thus can both mean that I have learned to read in school and also that I am in a position to read (as in "I can read the text if you want.")
For the sake of clarity, however, and to be absolutely clear, the translation "We didn't know how to read" would be better.
