The wedding dress incident was dreadful, unforgivable in my opinion.
That said - again you were very passive as was dh over the whole thing which in a twist of irony seems to have set the course for the whole marriage. I have to say I'd have been telling him he gets the dress back in time for it to be altered by someone else or no wedding!
Why are you so passive op?
(As an aside and somewhat off topic - having worked in the wedding industry I would strongly advise never to have anyone but an experienced bridal seamstress alter a bridal or bridesmaid dress, there are unfortunately many good tailoresses or amateur sewers who THINK they can do this work, it's in fact incredibly skilled and delicate work. I've had to "rescue" several dresses or brides from such decisions)
He hadn’t personally done anything wrong
Actually he did, he COMPLETELY failed to stand up for you and if he's not doing it as you're about to marry he's definitely not going to once married. I'd have walked too.
On my wedding day my dad (the one who's usually most toxic/narcissistic) was on good form, another relative was a fucking nightmare! Too outing to detail exactly how, I was unaware as the incident occurred in the church about 5 mins before dad and I arrived so even dad wasn't there, he was in the car with me, it was the groom who cleverly and discreetly asked her to go somewhere private with him to help him with an outfit issue as a way to get her to himself and then he basically (but politely and calmly) told her to pack it in and behave! Which she then did. He even got her to apologise to the person she pissed off then and there (a minor miracle frankly!) and somehow managed it that I knew nothing until we were on our honeymoon. I did have words with the person when we got back from honeymoon but I was calmer by then too which I'm sure helped in meaning I dealt with them in such a way they couldn't claim I "had a go"
Very well handled by the groom (my now ex - for all his faults he figured out how to deal with my lot very early on and minimised the stress caused to me, I found out after we married that my lovely now ex mil was from a similarly toxic family, she advised him very well on how to handle them that meant it rarely erupted into proper "rows" and when it did it was most definitely my lot being dicks!)
Until you both get ASSERTIVE with her (given all you've said about both of you I think an excellent post Xmas gift you could reward yourselves with is a proper - albeit probably virtual at the moment but I would HIGHLY recommend a truly interactive one where the instructor role plays with you both) then your lives, and your dcs (toxic parents make for toxic grandparents - trust me!) will be utterly miserable for potentially decades yet even if you left him.
You HAVE to take a stand, not doing so is also you making a choice - choosing for you AND your children to be treated like dirt and in your dcs case this will teach them that's what they deserve, and that can carry through to their adult lives.
Doing nothing is a choice.
Way I see it there's 3 options:
You leave your husband - which puts you out of target range but leaves your dc vulnerable
You stay and maintain the status quo - which means decades of tension and tiptoeing around this woman AND teaches your dc that such behaviour is acceptable and they deserve such treatment from their gran, aunts and father which makes them more vulnerable to accepting being treated poorly, even abusively by others
You stand up for yourself and insist he also stands up for his family (which is you and the dc now NOT her in terms of priority) - will be painful and difficult initially but you will likely find that eventually she will learn she can't get away with this crap with you OR your dc and even dh, or at the very least you will build a strong unit with dh and together you'll be able to withstand and withdraw as a unit from whatever she throws at you.
I'm from a family FULL of toxic relatives. Over the years I have learned to set boundaries, maintain them, not be drawn into lengthy disputes.
Eg
Shoe shop incident - I'd have said something like "I did not call you fat nor anything like it, I was merely trying to help. If you cannot behave appropriately we are going you can make your own way home" and done exactly that - walked away and left her with nobody to tantrum against.
Wedding dress - (assuming she's an actual bridal seamstress 
) by 2 weeks before the wedding I'd have asked when I was to go for her to measure up and if she ummed and ahhed I'd have said "Ok well I need to know it's sorted so I'll be collecting it tomorrow" and I'd have been there to collect it, no ifs buts or maybes and if she wasn't in I'd have waited till she was. Wouldn't have entered into length discussion if she was an arse about it just stood my ground "my dress please where is it?" Stuck record style until she handed it over.
I have to say I find it hard to believe given how extreme she is that there was NO indication in the whole time you were with dh up to the wedding? So I wouldn't have handed her the dress in the first place!
agree you're being scapegoated too.
This is one time I think couples therapy could be a good idea as I wouldn't trust him to be honest with a therapist, find one who is properly accredited (anyone can call themselves a therapist or counsellor unfortunately in the Uk it's not a protected profession - it should be!) and who is experienced in dealing with toxic family dynamics (even full on psychiatrists and psychologists can be poor on this)
That AND assertiveness training is the very best thing you could do for yourself and your dc