In a medium sized sauce pan melt the butter over medium heat. Add the chopped onion, salt and pepper and saute. Remove from heat and whisk in the flour until a smooth paste is formed. Then add milk and continue to cook until the mixture is thick and bubbling gently.
In a greased (use shortening or lard) oven dish layer half the potatoes, with half of the onion rings and top with half of the sauce mixture. Layer the rest of the potatoes and onions and add the rest of the sauce.
Bake at 375F covered for 45 minutes, then remove cover and continue baking for another 30 minutes.
Note: It seems like a lot of onion but it really works with this dish. I usually sprinkle some parsley on top just to add colour.