In a small saucepan over low heat, melt butter.
Stir in flour, salt and pepper until smooth and bubbly.
Gradually add milk, stirring constantly.
Bring to a boil; boil for 2 minutes.
Remove from the heat.
In a greased 1-qt.baking dish, layer half of the potatoes.
Add the onion and half of the sauce.
Top with remaining potatoes and sauce.
Cover and bake at 350° for 35-40 minutes or until potatoes are tender.