Arrange half the potato slices in a greased 1 1/2-quart casserole dish. Top with onion and remaining potatoes; add salt and pepper to taste.
In a medium saucepan, melt butter over medium heat. Add flour and salt; stir constantly with a whisk one minute. Stir in milk; cook until thickened. Stir in 1 1/2 cups cheese; continue to stir until melted.
Pour over potatoes; cover with aluminum foil. Bake at 400° for one hour. Uncover, sprinkle with remaining cheese. Bake 10 to 15 more minutes or until lightly browned.