Last time I checked, it was more of a fashion trend thing, especially flaunting your wealth (hence the big wigs, intricate cloth patterns, gem/gold/silver encrusted sections, etc.). I highly doubt it was a way to boost war confidence for most unless they were insecure in their own capabilities; like, you'll notice that after the Great Northern War started when Karl was 18 (if I remember right, the pic you provided was from when he was around 15 at his coronation), he started cutting his hair very short, not wearing wigs, and ditched all the fancy clothes for more form fitting, standard soldier's uniforms (save for a fine material cape that would only seem special if you got close enough to really inspect it since the thing was just a navy blue cloth that matched his uniform) and damn well proved himself enough of a terrifyingly powerful force without having to dress all gloriously.

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His personal beliefs of hating people flaunting their wealth probably caused him to reject his old style as well.