Melt butter, stir in flour, salt and pepper. Cook until smooth and creamy. Remove from heat. Stir in milk. Return to stove and heat to boiling, stirring constantly.
Grease 1 quart casserole. Layer half potatoes, all the onion, half the sauce. Add rest of potatoes and sauce. Dot with 1 tsp. butter.
Bake covered at 350 degrees for 30 minutes, then uncovered 35 minutes.