Laudator Temporis Acti

Some see a reference to the sword of Damocles in these lines of Horace (Odes 3.1.17-21, tr. John Conington):

When guilty Pomp the drawn sword sees
  Hung o'er her, richest feasts in vain
Strain their sweet juice her taste to please;
  No lutes, no singing birds again
Will bring her sleep.

destrictus ensis cui super impia
cervice pendet, non Siculae dapes
dulcem elaboratum saporem,
non avium citharaeque cantus
somnum reducent.

Conington's translation obscures the fact that the feasts are Sicilian (Siculae dapes). Sicily was the homeland of the tyrant Dionysius (430-367 B.C.) and his courtier Damocles.

Cicero (Tusculan Disputations 5.21.61-62, tr. C.D. Yonge) is the chief source for the story of Dionysius and Damocles:

For once, when Damocles, one of his flatterers, was dilating in conversation on his forces, his wealth, the greatness of his power, the plenty he enjoyed, the grandeur of his royal palaces, and maintaining that no one was ever happier, "Have you an inclination," said he, "Damocles, as this kind of life pleases you, to have a taste of it yourself, and to make a trial of the good fortune that attends me?"

And when he said that he should like it extremely, Dionysius ordered him to be laid on a bed of gold with the most beautiful covering, embroidered and wrought with the most exquisite work, and he dressed out a great many sideboards with silver and embossed gold. He then ordered some youths, distinguished for their handsome persons, to wait at his table, and to observe his nod, in order to serve him with what he wanted.

There were ointments and garlands; perfumes were burned; tables provided with the most exquisite meats. Damocles thought himself very happy. In the midst of this apparatus, Dionysius ordered a bright sword to be let down from the ceiling, suspended by a single horse-hair, so as to hang over the head of that happy man.

After which he neither cast his eye on those handsome waiters, nor on the well-wrought plate; nor touched any of the provisions: presently the garlands fell to pieces. At last he entreated the tyrant to give him leave to go, for that now he had no desire to be happy. Does not Dionysius, then, seem to have declared there can be no happiness for one who is under constant apprehensions?

In Richard Westall's 1812 painting The Sword of Damocles, the "handsome waiters" are replaced by waitresses.

The story also appears in Sidonius, Letters 2.13.6-8 (tr. O.M. Dalton):

History tells us that Damocles was a Sicilian of Syracuse, and an acquaintance of the tyrant Dionysius. One day, when he was extolling to the skies the privileges of his patron's life without any comprehension of its drawbacks, Dionysius said to him: "Would you like to see for yourself, at this very board, what the blessings and the curses of royalty are like?" "I should think I would," replied the other.

Instantly the dazzled and delighted creature was stripped of his commoner's garb and made resplendent with robes of Tyrian and Tarentine dye; they set him on a gold couch with coverings of silk, a figure glittering with gems and pearls.

But just as a Sardanapalian feast was about to begin, and bread of fine Leontine wheat was handed round; just as rare viands were brought in on plate of yet greater rarity; just as the Falernian foamed in great gem-like cups and unguents tempered the ice-cold crystal; just as the whole room breathed cinnamon and frankincense and exotic perfumes floated to every nostril; just as the garlands were drying on heads drenched with nard, -- behold a bare sword, swinging from the ceiling right over his purple-mantled shoulders, as if every instant it must fall and pierce his throat.

The menace of that heavy blade on that horsehair thread curbed his greed and made him reflect on Tantalus; the awful thought oppressed him that all he swallowed might be rendered through gaping wounds.

He wept, he prayed, he sighed in every key; and when at last he was let go, he was off like a flash, flying the wealth and the delights of kings as fast as most men follow after them. A horror of high estate brought him back with longing to the mean, nicely cautioned never again to think or call the mortal happy who lives ringed round with army and guards, or broods heavy over his spoils while the steel presses no less heavily upon him than he himself upon his gold.