While it did help represent some of the realities of fighting in tight quarters, the main reason for the overcrowding debuff in Gold was that the engine didn't support unit collisions and we didn't want to encourage the tactic of stacking all your units to create a super unit.

In contrast, Rome does support unit collisions so, even if you do direct you units to overlap, there's a practical limit to the number of individual guys who can get within combat range of each other. To further encourage proper formations, some stances like the battleline have bonuses that only apply when a unit is properly in formation.