Margaret Thatcher secretly considered the use of troops to break the on-going strike by coal miners, documents released by the National Archives show.
The papers show that ministers and officials repeatedly warned that a confrontation with the National Union of Mineworkers (NUM) and its leader, Arthur Scargill, was inevitable.
A secret Whitehall working group - codenamed MISC 57 - was established to lay the ground for the battle to come.
Plans were set in train quietly to purchase land next to electricity power stations - which were nearly all coal-fired - so that coal could be stockpiled to keep them running through a strike.
A flag flies at half-mast out of respect for Baroness Thatcher outside Cheshire West and Chester HQ in Chester.
In Liverpool, the city council made the decision not to show the funeral on the big screen in the town centre in Clayton Square.
News from Nowhere, a radical and community bookshop in Liverpool, has sold party packs to celebrate Thatcher's funeral.
The packs contained black balloons and party poppers with the politician's face on bearing the logo: "Still Hate Thatcher".
Ms Callaghan added that T-shirts and mugs bearing the slogan "I wanted to go to Margaret Thatcher's state funeral years ago" had been selling well "even before she died".
A book of condolence for Baroness Thatcher has been opened at Cheshire West & Chester Council, HQ.
Baroness Thatcher's ceremonial funeral is a "fitting tribute" to a major national figure, David Cameron said.
Mr Cameron told BBC Radio 4's Today programme: "I think it will be quite a sombre event but it is a fitting tribute to a great prime minister, respected around the world.
"I think other countries in the world would think Britain had got it completely wrong if we didn't mark this in a proper way."
The Prime Minister urged the Iron Lady's political opponents to show "respect" during the event, even though they may have disagreed with her policies.