Was that the purpose, or was it meant to allow extra lux trades to keep happiness up?
No, the exploit lies in using the civ's UB to, indeed, exploit the AI's tendency to hoard rather than use its gold. If the AI were programmed to better-use its gold rather than hoard unnecessary quantities, you wouldn't be able to reliably trade luxes for gold (and as it is I often find myself short of civs with the gold for RAs on Immortal, let alone the gold to trade for multiple luxes).
And although Civ is a single-player game first and foremost, it shouldn't be neglected that the civ doesn't work when you don't have AI opponents, or on duel or other small maps where you have very few, and it can be very heavily contingent on starting position and particularly who it starts close to - if most neighbouring civs have the same luxes, it's no use. If you have multiple luxes you can't shift (as typically happens to me in most games on all map sizes), the bazaar gives you no useful benefit. None of which is consistent with Arabia being the "strongest civ". Like Spain stumbling on El Dorado, it can be gamebreaking when it works, but look where Spain is now.