Peixoto, known as the "Iron Marshal" (marechal de ferro ), ousted all the state governors who had supported Deodoro, provoking violence in many parts of the country. One of the bloodiest of these struggles was the civil war that exploded in Rio Grande do Sul in 1893 and soon spread into Santa Catarina and Paraná, pitting former monarchist liberals against republicans. Concurrently, the fleet in Guanabara Bay at Rio de Janeiro challenged Peixoto, and the naval revolt quickly became linked to the struggle in the South. Peixoto's diplomat in Washington, Salvador de Mendonça, with the help of New York businessman Charles Flint, was able to assemble a squadron of ships with American crews, which proved decisive in ending the standoff in Guanabara Bay. The United States government, interested in Brazilian commerce and in the republic's survival, permitted this mercenary effort to occur and sent several cruisers to provide a barely concealed escort. This was the first documented American intervention in Brazil's internal affairs, and significantly it was organized privately.

Deodoro da Fonseca's dissolution of Congress, his resignation, Peixoto's assumption of power, and the outbreak of civil war split the officer corps and led to the arrest and expulsion of several senior officers. Although the power struggles that produced the fighting in Rio Grande do Sul during 1893-95 were local in origin, Peixoto made them national by siding with republican Governor Julio de Castilhos. The savage combat and the execution of prisoners and suspected sympathizers, in what historian José Maria Bello called the "cruelest of Brazil's civil wars," was shameful on both sides. Peixoto's fierce defense of the republic made him the darling of the Jacobins and from then on a symbol of Brazilian nationalism. In November 1894, because of his ill health (he died in 1895) and the military's disunity, Peixoto turned the government over to a spokesman for the agrarian coffee elite, São Paulo native Prudente José de Morais Barros, also known as Prudente de Morais, the first civilian president (1894-98). Prudente de Morais negotiated an end to the war in the South and granted amnesty to the rebels and the expelled officers. He weakened the army's staunchest republicans and sought to lower the military's political weight. He promoted officers committed to creating a professional force that would be at the disposal of the national authorities, who would determine how it was to be employed. A General Staff (Estado Geral), established in 1896 on the German model, was to shape this new army.