Is there any way (short of using FreeCol or whatever) to increase this dumb limit? It was really annoying to be unable to turn soldiers back into dragoons after a defeat just because a few colonies had increased their population and the REF was spamming new units left and right.

Have any hacker tried to look at what causes this limit exactly? If the game has a static array for units, for example, then it's "just" a question of finding where in the exe is the value for the array size, and then increase it.

agree, I was unable to complete my game because of that limit -_-
I heard the cap was deleted on Steam version, not sure tho

I have played Colonization more than a dozen times and have never run into a cap issue for military units.
You need horses to make dragoons. That must be the issue, a lack of horses, which means you didn't plan ahead and store more of them. I make sure I have wagons and ships full of them.