Return True if all characters in a string are in another string

This is a perfect use case of sets. The following code will solve your problem:

def only_uses_letters_from(string1, string2):
   """Check if the first string only contains characters also in the second string."""
   return set(string1) <= set(string2)

sets are fine, but aren't required (and may be less efficient depending on your string lengths). You could also do simply:

s1 = "bird"
s2 = "irbd"

print all(l in s1 for l in s2)  # True

Note that this will stop immediately as soon as a letter in s2 isn't found in s1 and return False.