Welcome to the Forum, Deec.
"Cloth wiring" has a more pejorative nickname of "Rag Wire".
Here's the synopsis of the history. The advent of "synthetic rubber" insulation (with a minimum of about 13% real rubber), at the beginning of the 1900s provided a stable, commodity, insulation for wiring. However, rodents, etc., went after the synthetic insulation, so a cotton weave sleeve was applied that was impregnated with a bituminous compound that was highly un-palatable to these chewing critters. The bituminous compound impregnated cotton sleeve is NOT the insultation, only the synthetic rubber is. The outer sheath on early Nonmetallic Sheathed Cable and the Flexible Loom used on "fished" Knob & Tube, was also a bituminous compound impregnated cloth.
Over time, the aromatics that are part of the bituminous compound outgas, leaving the cotton to begin to unravel with minimal disturbance. The appearance of the unraveled cotton weave is unsightly, but not a lessening of the quality of the insulation itself.
Now, this unraveling tends to be quickened by heat, which makes it especially noticeable above ceiling light fixtures that have a history of over-lamping with incandescent lamps while being buried in thermal insulation. Regrettably, the rubber itself can be aged to end-of-life failure by this heat. Other aging influences are humidity, ultraviolet light and ozone.