Silverlady, I'm so sorry MIL is so rude and cruel. My first thought was, don't be in a room alone w/ her. If DH leaves the room, find a reason to leave w/ him and don't reenter until he does. If he notices it, and asks why, let him know.
If you do find yourself alone w/ MIL and she makes a nasty remark, I would challenge her on it (Whatever did you mean by that?"). If she follows w/ anothe rude comment, let her know you think it's rude. But be prepared for her to protest she was "only joking" or "didn't mean it the way you took it" or that you're "too sensitive." Never mind. She'll begin to realize you're onto her and not going to tolerate it anymore. Or yes, maybe record her, as some have suggested.
As for gifts, I wouldn't worry about it too much anymore. She may actually believe she's "supposed to" gift her DS more generously than an inlaw. And yes, she may make it a habit to recycle old paper. (I have a cousin who does this. Some people think it's practical and clever, others find it cheap, and still others, don't care.) But if you really think she's deliberately being rude via gifts, then I wouldn't buy her any at all. No, I wouldn't "stoop to her level" by going cheap, I would just leave her gifts up to DH from now on. She's his mum, after all.
If you get to the point where you really would rather not be around her, I think that's ok as long as you don't try to stop DH from seeing her. She may feel snubbed and hurt, but what does she expect after all her rude comments, etc? Besides, maybe she would really rather just be w/ DS.
Gotta, I think I would have to draw the line at physical abuse. No way would I go near this woman again, and no way would she be welcome in my home. And so what if DH is "horrified" if you tell him - he should be! He can visit her on his own, if he wants, but, IMO, no way should you accompany him to a woman who is abusive to you. And if he decides not to visit her anymore, as you fear, more power to him! IMO, he should take a stand against her abusing his wife. But I realize he might have conflicting emotions when it comes to his mum. So he may still want to see her, but he shouldn't expect you to.
Or perhaps he won't be as shocked as you think. If she has been doing this to SIL all these years, perhaps she has always been abusive, and DH will have stories to tell you. I suspect she tries to see if she can get away w/ one slap, and if she can, there will be more. Don't give her the chance.
Minxie, love your idea!