That's the standard setup for cooler bypass on the GPU, Vernatherms are used on some aviation engines, including the aviation 470. The link I gave you was to the aircraft 470 folder, which still covers the cylinders. You need the GPU manuals for the crankcase:
Index of /pdf/aircraftengines/continental/gpu
You are looking at item #22 on the diagram below. It is essentially a low pressure relief valve. The concept is, when oil is cold it is thicker (higher viscosity) and therefore requires higher pressure to flow through the cross over gallery (item #14) and/or the cooler. This is not gauge pressure, it strictly responds how much pressure drop occurs through passage #14/11 and across the cam bearing. When the oil is thick, the bypass valve opens, feeding the cam and crank bearings directly. When the oil heats up, the pressure drops and the bypass closes, forcing the oil to flow through the cooler.
John is correct, you want 1/2" ID minimum hoses round trip to cooler, smaller hoses decrease the oil flow through the cooler, making for a hotter running engine. If the bypass was/is gutted, more oil would bypass the cooler and the engine would run hotter. If the bypass were plugged, all oil would always flow through the cooler and the oil would run cold.
If you want the oil to run warmer, you want a lighter spring so the bypass stays open on thinner oil. Also check the condition of the ball and seat, the more it leaks the more oil that bypasses the cooler, leading to higher oil temp.
As a hint, note that the remainder of the cam and crank bearings receive most of their oil when cold via the bypass, a good reason to warm these things up before hard use.
Finally, before doing anything, make sure your gauge is working correct. Oil temp between 180-200 F is about optimum on 50 weight. You might also want to consider multi-weight in the winter to get the oil temp up (thinner oil).
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