Using rags or cloths to mute a banjo is not limited to old time players - you'll even find it as a suggestion in Sully's Irish Banjo book (tenor style).

I have known players try rags, etc. to try to alter the tone. One particular example was someone with a particularly harsh and loud banjo with a cast alloy frame. He discovered that sticking some heavy carpet around the inside of the rim gave the instrument a much more pleasant tone.

Jon