However, before the new army could take shape, it was used in 1897 to destroy the religious community of Canudos in the sertão of Bahia, which the Jacobins thought mistakenly was a hot-bed of monarchist sedition. The Rio de Janeiro government, which saw monarchists everywhere, threw a force of 9,500 against a population of perhaps 30,000. Some 4,193 soldiers were wounded between July and October 1897, and the townspeople were killed, taken prisoner, or fled. Canudos was erased in the same fashion that Indian villages had been and continued to be erased. Although the campaign's symbolic value as a defense of the republic faded as the reality became known, it remained a powerful warning to marginal folk throughout Brazil that they would not be permitted to challenge the hierarchical order of society. In this sense, Canudos was a step in creating mechanisms of social control in the postslavery era.

Canudos affected the political scene immediately when a returning soldier, the foil in a high-level Jacobin conspiracy, attempted to assassinate President Prudente de Morais but killed the minister of war instead, thereby acting as a catalyst for rallying support for the government. The abortive assassination made possible the election of Manuel Ferraz de Campos Sales (president, 1898-1902). In the army, the attempt consolidated the hold of generals who opposed Floriano Peixoto and were interested in professionalizing the institution.

The turmoil of the 1890s and particularly Canudos suspended the military's capability to exercise the moderating role that it supposedly inherited from the monarchy. By 1898 the rural-based regional oligarchies had regained command of the political system. Their fiscal policies reflected their belief that Brazil was an agricultural country whose strength was in supplying Europe and North America with coffee, rubber, sugar, tobacco, and many natural resources.